10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017

or

q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____________ to _____________

Commission File Number:  000-30111

Lexicon Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	76-0474169
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

8800 Technology Forest Place

The Woodlands, Texas 77381

(Address of Principal Executive Offices and Zip Code)

(281) 863-3000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer þ Non-accelerated filer

Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registration has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No þ

As of May 1, 2017, 105,235,366 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

Lexicon Pharmaceuticals, Inc.

Table of Contents

		Page
Factors Affecting Forward-Looking Statements		2
Part I – Financial Information		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets – March 31, 2017 (unaudited) and December 31, 2016	3
	Consolidated Statements of Comprehensive Loss (unaudited) – Three Months Ended March 31, 2017 and 2016	4
	Consolidated Statements of Stockholders’ Equity (unaudited) – Three Months Ended March 31, 2017 and 2016	5
	Consolidated Statements of Cash Flows (unaudited) – Three Months Ended March 31, 2017 and 2016	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
Part II – Other Information		26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29
Signatures		30

The Lexicon name and logo are registered trademarks and XERMELO™ is a trademark of Lexicon Pharmaceuticals, Inc.

——————

Factors Affecting Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Part II, Item 1A. - Risk Factors,” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not under any duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual results, unless required by law.

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Part I – Financial Information

Item 1.                 Financial Statements

Lexicon Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

	As of March 31,			As of December 31,
	2017			2016
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	2,455		$	46,600
Short-term investments	257,288			299,904
Accounts receivable, net of allowances of $4	8,733			7,492
Inventory	236			—
Prepaid expenses and other current assets	10,376			3,878
Total current assets	279,088			357,874
Property and equipment, net of accumulated depreciation and amortization of $60,362 and $59,875, respectively	18,995			19,390
Goodwill	44,543			44,543
Other intangible assets, net of accumulated amortization of $147 and $0, respectively	53,210			53,357
Other assets	428			461
Total assets	$	396,264		$	475,625
Liabilities and Equity
Current liabilities:
Accounts payable	$	41,945		$	52,877
Accrued liabilities	10,191			32,114
Current portion of deferred revenue	69,172			63,372
Current portion of long-term debt, net of deferred issuance costs	15,753			16,280
Total current liabilities	137,061			164,643
Deferred revenue, net of current portion	28,750			48,934
Long-term debt, net of deferred issuance costs	85,268			85,167
Deferred tax liabilities	10,023			18,675
Other long-term liabilities	559			805
Total liabilities	261,661			318,224
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $.001 par value; 225,000 shares authorized; 105,338 and 104,582 shares issued, respectively	105			105
Additional paid-in capital	1,423,911			1,411,222
Accumulated deficit	(1,287,245		)	(1,250,363		)
Accumulated other comprehensive loss	(264		)	(195		)
Treasury stock, at cost, 122 and 306 shares, respectively	(1,904		)	(3,368		)
Total equity	134,603			157,401
Total liabilities and equity	$	396,264		$	475,625

The accompanying notes are an integral part of these consolidated financial statements.

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Lexicon Pharmaceuticals, Inc.

Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Revenues:
Net product revenue	$	721		$	—
Collaborative agreements	17,565			12,494
Subscription and license fees	7			—
Total revenues	18,293			12,494
Operating expenses:
Cost of sales (including finite-lived intangible asset amortization)	225			—
Research and development, including stock-based compensation of $1,184 and $989, respectively	43,581			37,002
Increase in fair value of Symphony Icon, Inc. purchase liability	2,101			965
Selling, general and administrative, including stock-based compensation of $1,047 and $846, respectively	14,871			8,398
Total operating expenses	60,778			46,365
Loss from operations	(42,485		)	(33,871		)
Interest expense	(1,588		)	(1,649		)
Interest and other income, net	530			637
Consolidated net loss before taxes	(43,543		)	(34,883		)
Income tax benefit	8,652			—
Net loss	$	(34,891	)	$	(34,883	)
Net loss per common share, basic and diluted	$	(0.33	)	$	(0.34	)
Shares used in computing consolidated net loss per common share, basic and diluted	104,461			103,682
Other comprehensive loss:
Unrealized gain (loss) on investments	(69		)	516
Comprehensive loss	$	(34,960	)	$	(34,367	)

The accompanying notes are an integral part of these consolidated financial statements.

4

Lexicon Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

	Common Stock			Additional						Accumulated Other
	Shares	Par Value		Paid-In Capital			Accumulated Deficit			Comprehensive Gain (Loss)			Treasury Stock			Total
Balance at December 31, 2015	103,860	$	104	$	1,397,646		$	(1,108,934	)	$	(219	)	$	(2,747	)	$	285,850
Stock-based compensation	—	—		1,835			—			—			—			1,835
Issuance of common stock under Equity Incentive Plans	223	—		184			—			—			—			184
Repurchase of common stock	—	—		—			—			—			(621		)	(621		)
Net loss	—	—		—			(34,883		)	—			—			(34,883		)
Unrealized gain on investments	—	—		—			—			516			—			516
Balance at March 31, 2016	104,083	$	104	$	1,399,665		$	(1,143,817	)	$	297		$	(3,368	)	$	252,881
Balance at December 31, 2016	104,582	$	105	$	1,411,222		$	(1,250,363	)	$	(195	)	$	(3,368	)	$	157,401
Cumulative effect of change in accounting principle	—	—		1,991			(1,991		)	—			—			—
Issuance of common stock to designees of Symphony Icon Holdings LLC	660	—		10,499			—			—			—			10,499
Stock-based compensation	—	—		2,231			—			—			—			2,231
Issuance of common stock under Equity Incentive Plans	96	—		1,111			—			—			—			1,111
Issuance of treasury stock	—	—		(3,143		)	—			—			3,143			—
Repurchase of common stock	—	—		—			—			—			(1,679		)	(1,679		)
Net loss	—	—		—			(34,891		)	—			—			(34,891		)
Unrealized loss on investments	—	—		—			—			(69		)	—			(69		)
Balance at March 31, 2017	105,338	$	105	$	1,423,911		$	(1,287,245	)	$	(264	)	$	(1,904	)	$	134,603

The accompanying notes are an integral part of these consolidated financial statements.

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Lexicon Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net loss	$	(34,891	)	$	(34,883	)
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
Depreciation and amortization	634			521
Increase in fair value of Symphony Icon, Inc. purchase liability	2,101			965
Stock-based compensation	2,231			1,835
Amortization of debt issuance costs	110			125
Deferred tax benefit	(8,652		)	—
Loss on disposal of property and equipment	—			12
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(1,241		)	170
Increase in inventory	(236		)	—
Increase in prepaid expenses and other current assets	(6,498		)	(4,134		)
Decrease in other assets	33			—
Increase (decrease) in accounts payable and other liabilities	(24,703		)	3,836
Decrease in deferred revenue	(14,384		)	(12,187		)
Net cash used in operating activities	(85,496		)	(43,740		)
Cash flows from investing activities:
Purchases of property and equipment	(92		)	(54		)
Purchases of investments	(60,905		)	(208,986		)
Maturities of investments	103,452			75,400
Net cash provided by (used in) investing activities	42,455			(133,640		)
Cash flows from financing activities:
Proceeds from issuance of common stock	1,111			184
Repurchase of common stock	(1,679		)	(621		)
Repayment of debt borrowings	(536		)	(491		)
Net cash used in financing activities	(1,104		)	(928		)
Net decrease in cash and cash equivalents	(44,145		)	(178,308		)
Cash and cash equivalents at beginning of period	46,600			202,989
Cash and cash equivalents at end of period	$	2,455		$	24,681
Supplemental disclosure of cash flow information:
Cash paid for interest	$	332		$	378
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in satisfaction of Symphony Icon payment obligation	$	10,499		$	—
Unrealized gain (loss) on investments	$	(69	)	$	516

The accompanying notes are an integral part of these consolidated financial statements.

6

Lexicon Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1.Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

The accompanying consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

For further information, refer to the financial statements and footnotes thereto included in Lexicon’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. 

Use of Estimates: The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.  As of March 31, 2017 and December 31, 2016, short-term investments consist of U.S. treasury bills and corporate debt securities. The Company’s short-term investments are classified as available-for-sale securities and are carried at fair value, based on quoted market prices of the securities.  The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security.  Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity.  Net realized gains and losses, interest and dividends are included in interest income.  The cost of securities sold is based on the specific identification method.

Accounts Receivable:  Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services.   The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the economic climate and other factors that could affect collectibility.  Write-offs are evaluated on a case by case basis.

Inventory: Inventories are determined at the lower of cost or market value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods. The Company began capitalizing inventory during the three months ended March 31, 2017 once the U.S. Food and Drug Administration (“FDA”) approved XERMELO (telotristat ethyl) as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO were recorded as research and development expense in the consolidated statements of operations. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Inventory consisted of the following as of March 31, 2017 (in thousands):

Raw materials	$	200
Work-in-process	1
Finished goods	35
Total inventory	$	236

Concentration of Credit Risk: Lexicon’s cash equivalents, investments and accounts receivable represent potential concentrations of credit risk. The Company attempts to minimize potential concentrations of risk in cash equivalents and investments by placing investments in high-quality financial instruments. The Company’s accounts receivable are unsecured and are concentrated in pharmaceutical and biotechnology companies located in Europe and the United States.  The Company has not experienced any significant credit losses to date.  

7

Segment Information and Significant Customers: Lexicon operates in one business segment, which primarily focuses on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease. Substantially all of the Company’s revenues have been derived from drug discovery alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology licenses, subscriptions to its databases, government grants and contracts, compound library sales and product sales.

Property and Equipment: Property and equipment that is held and used is carried at cost and depreciated using the straight-line method over the estimated useful life of the assets which ranges from three to 40 years.  Maintenance, repairs and minor replacements are charged to expense as incurred.  Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term.  Significant renewals and betterments are capitalized.

Other Intangible Assets: Other intangible assets, net consist of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives. During the three months ended March 31, 2017, intangible assets relating to XERMELO of $24.7 million were reclassified from indefinite-lived to finite-lived assets once the FDA approved XERMELO. The Company recorded $0.1 million in amortization expense related to this asset, which is recorded as cost of sales in the accompanying consolidated statement of operations for the three months ended March 31, 2017.

During the three months ended March 31, 2017, the Company’s valuation allowance for its deferred tax assets decreased by $8.7 million due to the reclassification of intangible assets relating to XERMELO from indefinite-lived to finite-lived assets, which resulted in the related deferred tax liability now being considered a source of taxable income. The Company recorded a $8.7 million deferred tax benefit with a corresponding reduction in its deferred tax liability in the three months ended March 31, 2017 as a result of this reclassification.

Impairment of Long-Lived Assets:  Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There was no impairment of long-lived assets in the three months ended March 31, 2017 and 2016.

Indefinite lived intangible assets are also tested annually for impairment and whenever indicators of impairment are present. When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its intangible assets. If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates the asset’s fair value. If the carrying value of the asset exceeds its fair value, then the intangible asset is written down to its fair value.

Goodwill Impairment:  Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level.  The Company has determined that the reporting unit is the single operating segment disclosed in its current financial statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill.  If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized.  Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.  There was no impairment of goodwill in the three months ended March 31, 2017 and 2016.

Revenue Recognition: Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.  

Product Revenues

Product revenues consist of U.S. sales of XERMELO. Product revenues are recognized once the Company meets all four revenue recognition criteria described above. In March 2017, Lexicon began shipping XERMELO to its customers in the U.S. The Company recognizes revenue for product sales of XERMELO at the time the product is received by its specialty pharmacy customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns,

8

distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. Product shipping and handling costs are included in cost of sales.

Customer Credits: The specialty pharmacies are offered various forms of consideration, including allowances, service fees and prompt payment discounts. Lexicon expects the specialty pharmacies will earn prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates are based in part on third party market research data, and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy, in turn, charges back to Lexicon the difference between the price initially paid by the specialty pharmacy and the discounted price paid to the specialty pharmacy by the customer. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Collaborative Agreements

Revenues under collaborative agreements include both license revenue and contract research revenue. Activities under collaborative agreements are evaluated to determine if they represent a multiple element revenue agreement. The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. The Company accounts for those components as separate units of accounting if the following two criteria are met:

• The delivered item or items have value to the customer on a stand-alone basis; and

• If there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company’s control.

Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative estimated selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.

Future milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. A milestone is substantive if:

9

• The consideration payable to the Company is commensurate with the Company’s performance necessary to achieve the milestone or the increase in value to the collaboration resulting from the Company’s performance;

• Relates solely to the Company’s past performance; and

• Is reasonable relative to all of the other deliverables and payments within the arrangement.

Commercial milestones will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Subscription and license fees are recognized as revenue upon the grant of the technology license when performance is complete and there is no continuing involvement. Royalty revenues are recognized as earned in accordance with the contract terms at the time the royalty amount is fixed and determinable based on information received from the sublicensees and at the time collectibility is reasonably assured.

Cost of Sales: Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The Company began capitalizing inventory during the three months ended March 31, 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO have been recorded as research and development expense in the statements of operations. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Product shipping and handling costs are included in cost of sales. Cost of sales also includes the amortization of the in-process research and development intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Research and Development Expenses: Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred.  Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.

Stock-Based Compensation:  The Company recognizes compensation expense in its statements of comprehensive loss for share-based payments, including stock options and restricted stock units issued to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award.  Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met.  

The fair value of stock options is estimated at the date of grant using the Black-Scholes method.  The Black-Scholes option-pricing model requires the input of subjective assumptions.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.  For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in a change in the assumptions used for expected option lives and forfeitures.  Expected volatility is based on the historical volatility in the Company’s stock price.  The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions for options granted in the three months ended March 31, 2017 and 2016:

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	Expected Volatility		Risk-free Interest Rate		Expected Term	Dividend Rate
March 31, 2017:
Employees	62	%	1.7	%	4	—	%
Officers and non-employee directors	71	%	2.3	%	8	—	%
March 31, 2016:
Employees	63	%	1.1	%	4	—	%
Officers and non-employee directors	83	%	1.6	%	8	—	%

The following is a summary of option activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2017:

	Options		Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2016	4,834		$	11.24
Granted	709		14.43
Exercised	(96	)	11.53
Expired	(120	)	27.58
Forfeited	(3	)	15.80
Outstanding at March 31, 2017	5,324		11.29
Exercisable at March 31, 2017	2,875		$	11.48

During the three months ended March 31, 2017, Lexicon also granted its employees annual restricted stock units. These restricted stock units vest in four annual installments. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2017:

	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2016	875		$	8.13
Granted	418		14.44
Vested	(286	)	8.78
Forfeited	(4	)	10.37
Outstanding at March 31, 2017	1,003		$	10.56

Net Loss per Common Share: Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units are not included because they are antidilutive.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which amends FASB ASC Topic 606. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles for the determination of the measurement of revenue and the timing of when such revenue is recognized. Revenue recognition will reflect the transfer of goods or services to customers at an amount that is expected to be earned in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of Effective Date”, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual periods after December 15, 2017 including interim periods within that reporting period. Early application is permitted only for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Management is currently evaluating the impact of these pronouncements on Lexicon’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes

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in fair value recognized in net income. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Management does not expect the adoption of this pronouncement to have a material impact on Lexicon’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires companies that lease assets to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The pronouncement will also require additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this pronouncement on Lexicon’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation,” which is intended to simplify several aspects of the accounting for share-based payment award transactions. The Company adopted this pronouncement effective January 1, 2017. Upon adoption, the Company recognized approximately $6.1 million of accumulated excess tax benefits as deferred tax assets that under the previous guidance could not be recognized until the benefits were realized through a reduction in cash taxes paid. This part of the guidance is applied using a modified retrospective method with a cumulative-effect adjustment to the accumulated deficit for the excess tax benefits not previously recognized. However, given the full valuation allowance placed on the additional $6.1 million of deferred tax assets, the recognition of this provision of ASU 2016-09 had no impact to the Company’s accumulated deficit as of January 1, 2017. Additionally, the Company recorded an adjustment to accumulated deficit of $2.0 million as a result of making an entity-wide accounting policy election to account for forfeitures of share-based payment awards as they occur instead of estimating the number of awards that are expected to vest.

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3. Cash and Cash Equivalents and Investments

The fair value of cash and cash equivalents and investments held at March 31, 2017 and December 31, 2016 are as follows:

	As of March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	2,455	$	—	$	—		$	2,455
Securities maturing within one year:
U.S. treasury securities	191,443		—		(195		)	191,248
Corporate debt securities	66,109		—		(69		)	66,040
Total short-term investments	$	257,552	$	—	$	(264	)	$	257,288
Total cash and cash equivalents and investments	$	260,007	$	—	$	(264	)	$	259,743
	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
Cash and cash equivalents	$	46,600	$	—	$	—		$	46,600
Securities maturing within one year:
U.S. treasury securities	227,911		1		(107		)	227,805
Corporate debt securities	72,188		1		(90		)	72,099
Total short-term investments	$	300,099	$	2	$	(197	)	$	299,904
Total cash and cash equivalents and investments	$	346,699	$	2	$	(197	)	$	346,504

There were $7,000 in realized losses for the three months ended March 31, 2017, and no realized gains or losses for the three months ended March 31, 2016. The cost of securities sold is based on the specific identification method.

4. Fair Value Measurements

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities:

• Level 1 - quoted prices in active markets for identical investments, which include U.S. treasury securities

• Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.), which includes corporate debt securities

• Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of the Symphony Icon purchase consideration liability)

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The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities. The following table provides the fair value measurements of applicable Company assets and liabilities that are measured at fair value on a recurring basis according to the fair value levels described above as of March 31, 2017 and December 31, 2016:

	Assets and Liabilities at Fair Value as of March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	2,455	$	—	$	—	$	2,455
Short-term investments	191,248		66,040		—		257,288
Total cash and cash equivalents and investments	$	193,703	$	66,040	$	—	$	259,743

	Assets and Liabilities at Fair Value as of December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	45,093	$	1,507	$	—	$	46,600
Short-term investments	227,805		72,099		—		299,904
Total cash and cash equivalents and investments	$	272,898	$	73,606	$	—	$	346,504
Liabilities
Accrued liabilities	$	—	$	—	$	18,912	$	18,912
Total liabilities	$	—	$	—	$	18,912	$	18,912

The Company’s Level 3 liabilities, which consisted of the Symphony Icon purchase consideration liability, was estimated using a probability-based income approach utilizing an appropriate discount rate. Subsequent changes in the fair value of the Symphony Icon purchase consideration liability were recorded as an increase or decrease in Symphony Icon purchase liability expense in the accompanying consolidated statements of comprehensive loss. The following table summarizes the change in consolidated balance sheet carrying value associated with Level 3 liabilities for the three months ended March 31, 2017 and 2016 (in thousands).

Balance at December 31, 2016	$	18,912
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	2,101
Payment of contingent payment obligation with common stock and cash	(21,013		)
Balance at March 31, 2017	$	—
Balance at December 31, 2015	$	22,815
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	965
Balance at March 31, 2016	$	23,780

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include goodwill associated with the acquisitions of Coelacanth Corporation in 2001 and Symphony Icon in 2010 and intangible assets associated with the acquisition of Symphony Icon in 2010. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired.

5. Debt Obligations

Convertible Debt. In November 2014, Lexicon completed an offering of $87.5 million in aggregate principal amount of its 5.25% Convertible Senior Notes due 2021 (the “Notes”). The conversion feature did not meet the criteria for bifurcation as required by generally accepted accounting principles and the entire principal amount was recorded as long-term debt on the Company’s consolidated balance sheets.

The Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the Company and Wells Fargo Bank, N.A., as trustee. The Notes bear interest at a rate of 5.25% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The Notes mature on December 1, 2021. The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the Company will deliver for each $1,000 principal amount of converted Notes a number of shares of its common stock equal to the conversion rate, as described in the Indenture. The conversion rate is initially 118.4553 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of $8.442 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances.

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If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In connection with the issuance of the Notes, the Company incurred $3.4 million of debt issuance costs, which offsets long-term debt on the consolidated balance sheets. The debt issuance costs are amortized as interest expense over the expected life of the Notes using the effective interest method. The Company determined the expected life of the debt was equal to the seven-year term of the Notes. As of March 31, 2017, the balance of unamortized debt issuance costs was $2.2 million.

The fair value of the Notes was $161.1 million as of March 31, 2017 and was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

Mortgage Loan.  In April 2004, Lexicon obtained a $34.0 million mortgage on its facilities in The Woodlands, Texas.  The mortgage loan originally had a ten-year term with a 20-year amortization and a fixed interest rate of 8.23%. The mortgage was amended in September 2013 to extend the maturity date from April 2014 to April 2017, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged.  The mortgage had a principal balance outstanding of $15.8 million as of March 31, 2017. This entire balance is recorded as current portion of long-term debt in the accompanying consolidated balance sheet as of March 31, 2017 as there was a balloon payment due in April 2017. The mortgage was amended in April 2017 to extend the maturity date from April 2017 to April 2018, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged. The buildings and land that serve as collateral for the mortgage loan are included in property and equipment at $59.2 million and $2.7 million, respectively, before accumulated depreciation, as of March 31, 2017. The fair value of Lexicon’s mortgage loan approximates its carrying value.  The fair value of Lexicon’s mortgage loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

6. Arrangements with Symphony Icon, Inc.

On June 15, 2007, Lexicon entered into a series of related agreements providing for the financing of the clinical development of certain of its drug candidates, including XERMELO, along with any other pharmaceutical compositions modulating the same targets as those drug candidates (the “Programs”). The agreements included a Novated and Restated Technology License Agreement pursuant to which the Company licensed to Symphony Icon, a then wholly-owned subsidiary of Symphony Icon Holdings LLC (“Holdings”), the Company's intellectual property rights related to the Programs. Holdings contributed $45 million to Symphony Icon in order to fund the clinical development of the Programs.

Under a Share Purchase Agreement, dated June 15, 2007, between the Company and Holdings, the Company issued and sold to Holdings 1,092,946 shares of its common stock on June 15, 2007 in exchange for $15 million and an exclusive purchase option (the “Purchase Option”) that gave the Company the right to acquire all of the equity of Symphony Icon, thereby allowing the Company to reacquire all of the Programs. On July 30, 2010, Lexicon entered into an Amended and Restated Purchase Option Agreement (the “Purchase Option Agreement”) with Symphony Icon and Holdings and simultaneously exercised the Purchase Option, thereby reacquiring the Programs. Pursuant to the amended terms of the Purchase Option, Lexicon paid Holdings $10 million on July 30, 2010 and issued 1,891,074 shares of common stock to designees of Holdings on July 30, 2012 in satisfaction of an additional $35 million base payment obligation.

Lexicon also agreed to make up to $45 million in additional contingent payments, which would consist of 50% of any consideration Lexicon receives pursuant to any licensing transaction (a “Licensing Transaction”) under which Lexicon grants a third party rights to commercialize XERMELO or other pharmaceutical compositions modulating the same target as XERMELO (the “LG103 Programs”), subject to certain exceptions. The contingent payments would be due if and when Lexicon receives such consideration from a Licensing Transaction. In the event Lexicon received regulatory approval in the United States for the marketing and sale of any product resulting from the LG103 Programs prior to entering into a Licensing Transaction for the commercialization of such product in the United States, in lieu of any contingent payment from such a Licensing Transaction, Lexicon would pay Holdings the sum of $15 million and the amount of certain expenses Lexicon incurred after its exercise of the Purchase Option which were attributable to the development of such product, reduced by up to 50% of such sum on account of any contingent payments paid prior to such United States regulatory approval attributable to any such Licensing Transaction outside of the United States with respect to such product. In the event Lexicon made any such payment upon United States regulatory approval, Lexicon would have no obligation to make subsequent contingent payments attributable to any such Licensing Transactions for the commercialization of such product outside the United States until the proceeds of such Licensing Transactions exceed 50% of the payment made as a result of such United States regulatory approval. The contingent payments were payable in cash or a combination of cash and common stock, in Lexicon’s discretion,

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provided that no more than 50% of any contingent payment would be paid in common stock. In December 2014, Lexicon paid $5.8 million in cash and issued 666,111 shares of common stock to designees of Holdings in satisfaction of a $11.5 million contingent payment obligation as a result of receiving an upfront payment pursuant to Lexicon’s license and collaboration agreement with Ipsen. In April 2015, Lexicon paid $0.75 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving an additional upfront payment from Ipsen in March 2015. In September 2016, Lexicon paid $3.2 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving a milestone payment from Ipsen in August 2016 (see Note 8, Collaboration and License Agreements).

In September 2016, Lexicon entered into an amendment (the “Amendment”) to the Purchase Option Agreement with Holdings and Symphony Icon pursuant to which Lexicon agreed to pay Holdings $21.0 million upon Lexicon’s receipt of regulatory approval in the United States for the marketing and sale of XERMELO, such buyout amount to be in lieu of any remaining payments which may be or become payable to Holdings under the Purchase Option Agreement. The buyout amount may be paid in cash or a combination of cash and common stock, in Lexicon’s discretion, provided that no more than 50% of any contingent payment will be paid in common stock. In March 2017, Lexicon paid $10.5 million in cash and issued 659,905 in shares of common stock to designees of Holdings in satisfaction of its remaining contingent payment obligation as a result of receiving regulatory approval in the United States for the marketing and sale of XERMELO.

Lexicon accounted for the exercise of the Purchase Option and acquisition of Symphony Icon as a business combination. In connection with its acquisition of Symphony Icon, Lexicon paid $10.0 million in cash, and also agreed to pay Holdings additional base and contingent payments as discussed above. The fair value of the base and contingent consideration payments was $45.6 million and was estimated by applying a probability-based income approach utilizing an appropriate discount rate. This estimation was based on significant inputs that are not observable in the market, referred to as Level 3 inputs. Key assumptions include: (1) a discount rate of 14% for the base payments; (2) a discount rate of 18% for the contingent payments; and (3) a probability adjusted contingency. No discount rate was used in the valuation of the contingent consideration liability as of December 31, 2016 as the expected buyout was short-term in nature. As programs progress, the probability adjusted contingency was adjusted as necessary. Subsequent changes in the fair value of the Symphony Icon purchase consideration liability were recorded as increase or decrease in fair value of Symphony Icon purchase liability expense in the accompanying consolidated statements of comprehensive loss. The fair value of the Symphony Icon purchase consideration liability increased by $2.1 million and $1.0 million during the three months ended March 31, 2017 and March 31, 2016, respectively.

7.      Commitments and Contingencies

Operating Lease Obligations:  A Lexicon subsidiary leases office space in Basking Ridge, New Jersey under an operating lease agreement, the term of which began in June 2015 and terminates in December 2022. Rent expense is recognized on a straight-line basis over the lease term.  Lexicon is the guarantor of the obligations of its subsidiary under this lease agreement.  The maximum potential amount of future payments the Company could be required to make under this agreement is $3.6 million as of March 31, 2017. Additionally, Lexicon leases certain equipment under operating leases.

Legal Proceedings.  Lexicon is from time to time party to claims and legal proceedings that arise in the normal course of its business and that it believes will not have, individually or in the aggregate, a material adverse effect on its results of operations, financial condition or liquidity.

8. Collaboration and License Agreements

Lexicon has derived substantially all of its revenues from drug discovery and development collaborations, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, government grants and contracts, technology licenses, subscriptions to its databases and compound library sales.

Sanofi. In November 2015, Lexicon entered into a Collaboration and License Agreement (the “Sanofi Agreement”) with Sanofi for the worldwide development of Lexicon’s diabetes drug candidate sotagliflozin.

Under the Sanofi Agreement, Lexicon granted Sanofi an exclusive, worldwide, royalty-bearing right and license under its patent rights and know-how to develop, manufacture and commercialize sotagliflozin. Subject to specified exceptions, neither party may (a) perform clinical development activities relating to any other compound which inhibits sodium-glucose cotransporters type 1 or type 2 or (b) commercialize any such compounds in the United States, countries of the European Union and certain other specified countries, in each case during the royalty terms applicable in such countries. Among the specified exceptions is a right Lexicon retained to pursue the development of its LX2761 drug candidate, with respect to which Lexicon granted Sanofi certain rights of first negotiation specified in the Sanofi Agreement.

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Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $300 million. In addition, Lexicon is eligible to receive from Sanofi (a) up to an aggregate of $110 million upon the achievement of two development milestones relating to the achievement of positive results in certain Phase 3 clinical trials in type 2 diabetes patients, with such aggregate amount being predominantly allocated to one of the two development milestones, (b) up to an aggregate of $220 million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate to type 1 diabetes, (c) $100 million upon the achievement of a milestone based on the results of an outcomes study in type 2 diabetes patients the completion of which would likely occur after initial regulatory approval, and (d) up to an aggregate of $990 million upon the achievement of six commercial milestones that will be achieved upon reaching specified levels of sales. The Company believes that each of the development and regulatory milestones under the Sanofi Agreement is substantive. Due to the uncertainty surrounding the achievement of the future development and regulatory milestones, these payments will not be recognized as revenue unless and until they are earned, as the Company is not able to reasonably predict if and when the milestones will be achieved. Commercial milestones, which are not encompassed within the definition of milestones under generally accepted accounting principles, will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met. Lexicon is also entitled to tiered, escalating royalties ranging from low double digit percentages to forty percent of net sales of sotagliflozin, based on indication and territory, with royalties for the higher band of such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty reduction provisions. Royalties payable with respect to net sales of sotagliflozin for type 1 diabetes in the United States will also be reduced in the event Lexicon does not exercise its co-promotion option described below.

Lexicon will continue to be responsible for all clinical development activities relating to type 1 diabetes and will retain an exclusive option to co-promote and have a significant role, in collaboration with Sanofi, in the commercialization of sotagliflozin for the treatment of type 1 diabetes in the United States. If Lexicon exercises its co-promotion option, Lexicon will fund forty percent of the commercialization costs relating to such co-promotion activities. Sanofi will be responsible for all clinical development and commercialization of sotagliflozin for the treatment of type 2 diabetes worldwide and will be solely responsible for the commercialization of sotagliflozin for the treatment of type 1 diabetes outside the United States. Lexicon will share in the funding of a portion of the planned type 2 diabetes development costs over the next three years, up to an aggregate of $100 million. Sanofi will book sales worldwide in all indications.

The parties are responsible for using commercially reasonable efforts to perform their development and commercialization obligations pursuant to mutually approved development and commercialization plans.

The parties’ activities under the Sanofi Agreement are governed by a joint steering committee and certain other governance committees which reflect equal or other appropriate representation from both parties. If the applicable governance committee is not able to make a decision by consensus and the parties are not able to resolve the issue through escalation to specified senior executive officers of the parties, then Sanofi will have final decision-making authority, subject to limitations specified in the Sanofi Agreement.

The Sanofi Agreement will expire upon the expiration of all applicable royalty terms for all licensed products in all countries. The royalty term for each licensed product in each country is the period commencing on the effective date of the Sanofi Agreement and ending on the latest of expiration of specified patent coverage, expiration of specified regulatory exclusivity and 10 years following the first commercial sale in the applicable country. Either party may terminate the Sanofi Agreement in the event of an uncured material breach by the other party. Prior to completion of the core development activities for type 2 diabetes specified in the development plan, Sanofi may terminate the Sanofi Agreement on a country-by-country and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c) the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual property rights.

The Company considered the following deliverables with respect to the revenue recognition of the $300 million upfront payment:

• The exclusive worldwide license granted to Sanofi to develop and commercialize sotagliflozin;

• The development services Lexicon is performing for sotagliflozin relating to type 1 diabetes; and

• The funding Lexicon will provide for development relating to type 2 diabetes.

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The Company determined that the license had stand-alone value because it is an exclusive license that gives Sanofi the right to develop and commercialize sotagliflozin or to sublicense its rights. In addition, sotagliflozin is currently in development and it is possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Sanofi Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services for type 1 diabetes and the obligation to provide funding for development services for type 2 diabetes over the period of time Lexicon performs services or provides funding, currently expected to be through 2020.

The Company determined that the initial allocable arrangement consideration was the $300 million upfront payment because it was the only payment that was fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments or royalty payments. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of the license included: exercising the option to co-promote, estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services for type 1 diabetes by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $100 million in funding.

As a result of the allocation, the Company recognized $126.8 million of the $300 million upfront payment for the license in 2015. The Company is recognizing the $113.8 million allocated to the development services deliverable and the $59.4 million allocated to the funding deliverable over the estimated period of performance as the development and funding occurs. Revenue recognized under the Sanofi Agreement was $17.0 million and $12.0 million for the three months ended March 31, 2017 and 2016, respectively.

Ipsen Pharma SAS. In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen Pharma SAS (“Ipsen”) for the development and commercialization of telotristat ethyl outside of the United States and Japan (the “Licensed Territory”).

Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent rights and know-how to commercialize telotristat ethyl in the Licensed Territory. Ipsen is responsible for using diligent efforts to commercialize telotristat ethyl in the Licensed Territory pursuant to a mutually approved commercialization plan. Subject to certain exceptions, Lexicon will be responsible for conducting clinical trials required to obtain regulatory approval for telotristat ethyl for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan, and will have the first right to conduct most other clinical trials of telotristat ethyl. Lexicon is responsible for the costs of all clinical trials contemplated by the initial development plan. The costs of additional clinical trials will be allocated between the parties based on the nature of such clinical trials. Under the Ipsen Agreement, Ipsen has paid Lexicon an aggregate of $30.9 million through March 31, 2017, consisting of $24.5 million in upfront payments and a $6.4 million milestone payment in August 2016 upon the acceptance of the filing submitted by Ipsen to the European Medicines Agency for telotristat ethyl as an adjunct to somatostatin analog therapy for the long-term treatment of carcinoid syndrome. In addition, Lexicon is eligible to receive from Ipsen (a) up to an aggregate of approximately $27 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an aggregate of €72 million upon the achievement of specified sales milestones. Due to the uncertainty surrounding the achievement of the future regulatory and sales milestones, these payments will not be recognized as revenue unless and until they are earned as the Company is not able to reasonably predict if and when the milestones will be achieved. Lexicon is also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of telotristat ethyl in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture and supply of such units of telotristat ethyl. Lexicon and Ipsen have entered into a commercial supply agreement pursuant to which Lexicon will supply Ipsen’s commercial requirements of telotristat ethyl, and Ipsen will pay an agreed upon transfer price for such commercial supply.

The Company considered the following deliverables with respect to the revenue recognition of the $24.5 million upfront payments:

• The exclusive license granted to Ipsen to develop and commercialize telotristat ethyl in the Licensed Territory;

•The development services Lexicon is performing for telotristat ethyl;

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• The obligation to participate in committees which govern the development of telotristat ethyl until commercialization; and

•The obligation to supply commercial supply of telotristat ethyl, under a commercial supply agreement.

The Company determined that the license had stand-alone value because it is an exclusive license that gives Ipsen the right to develop and commercialize telotristat ethyl or to sublicense its rights. In addition, telotristat ethyl is currently in development and it is possible that Ipsen or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Ipsen Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performs services, currently expected to be through mid-2017.

Due to the inherent uncertainty in obtaining regulatory approval, the applicability of the commercial supply agreement is outside the control of Lexicon and Ipsen. Accordingly, the Company has determined the commercial supply agreement is a contingent deliverable at the onset of the Ipsen Agreement. As a result, the Company has determined the commercial supply agreement does not meet the definition of a deliverable that needs to be accounted for at the inception of the arrangement. The Company has also determined that there is no significant and incremental discount related to the commercial supply agreement that should be accounted for at the inception of the arrangement.

The Company determined that the initial allocable arrangement consideration was the $24.5 million upfront payments because they were the only payments that were fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished drug product. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of the license included: estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the selling price of the obligation to participate in committees by using internal estimates of the number of internal hours and salary and benefits costs to perform these services.

As a result of the allocation, the Company recognized $21.2 million of the $24.5 million upfront payments for the license in 2014, and an additional $1.4 million in 2015 upon entering into the amendment. The Company is recognizing the $1.7 million allocated to the development services deliverable over the estimated period of performance as development occurs, and is recognizing the $0.1 million allocated to the committee participation deliverable ratably over the estimated period of performance. Milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. Revenue recognized under the Ipsen Agreement was $0.5 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a biopharmaceutical company focused on the development and commercialization of breakthrough treatments for human disease.  We are presently devoting most of our resources to the commercialization or development of our four most advanced drug programs:

• We have obtained approval from the FDA to sell our first commercial product, XERMELO™ (telotristat ethyl), an orally-delivered small molecule drug for the treatment of carcinoid syndrome diarrhea in combination with somatostatin analog, or SSA, therapy in adults inadequately controlled by SSA therapy. We have commenced sales and marketing of XERMELO, and it is now commercially available to patients in the United States. We have granted Ipsen Pharma SAS an exclusive, royalty-bearing right to commercialize telotristat ethyl outside of the United States and Japan, and Ipsen has filed an application for regulatory approval to market telotristat ethyl in the European Union.

• We are developing sotagliflozin, an orally-delivered small molecule drug candidate, as a treatment for type 1 and type 2 diabetes. We have reported positive top-line primary efficacy endpoint data from two pivotal Phase 3 clinical trials of sotagliflozin in type 1 diabetes patients and are presently continuing such pivotal Phase 3 clinical trials and conducting a third Phase 3 clinical trial of sotagliflozin in type 1 diabetes patients. We have granted Sanofi an exclusive, worldwide, royalty-bearing right to develop, manufacture and commercialize sotagliflozin, and Sanofi is presently conducting Phase 3 development of sotagliflozin in type 2 diabetes.

• We are developing LX2761, an orally-delivered small molecule drug candidate, as a treatment for diabetes. We are presently conducting Phase 1 development of LX2761. We have granted Sanofi certain rights of first negotiation with respect to the future development and commercialization of LX2761.

• We are developing LX9211, an orally-delivered small molecule drug candidate, as a treatment for neuropathic pain. We have completed IND-enabling studies of LX9211 and are presently preparing to submit an IND and commence clinical development.

Compounds from our most advanced drug programs, as well as compounds from a number of additional drug discovery and development programs that we have advanced into various stages of clinical and preclinical development, originated from our own internal drug discovery efforts. These efforts were driven by a systematic, target biology-driven approach in which we used gene knockout technologies and an integrated platform of advanced medical technologies to systematically study the physiological and behavioral functions of almost 5,000 genes in mice and assessed the utility of the proteins encoded by the corresponding human genes as potential drug targets. We have identified and validated in living animals, or in vivo, more than 100 targets with promising profiles for drug discovery.

We are working both independently and through strategic collaborations and alliances with third parties to capitalize on our drug target discoveries and drug discovery and development programs. We seek to retain exclusive or co-exclusive rights to the benefits of certain drug discovery and development programs by developing and commercializing drug candidates from those programs internally, particularly in the United States for indications treated by specialist physicians. We seek to collaborate with other pharmaceutical and biotechnology companies, such as Ipsen and Sanofi, with respect to drug discovery or the development and commercialization of certain of our drug candidates, particularly with respect to commercialization in territories outside the United States, commercialization in the United States for indications treated by primary care physicians, or when the collaboration may otherwise provide us with access to expertise and resources that we do not possess internally or are complementary to our own.

We commercially launched XERMELO following regulatory approval in February 2017 for the treatment of carcinoid syndrome diarrhea in combination with SSA therapy in adults inadequately controlled by SSA therapy in the United States. Prior to the launch of XERMELO, we derived substantially all of our revenues from strategic collaborations and other research and development collaborations and technology licenses. To date, we have generated a substantial portion of our revenues from a limited number of sources.

Our operating results and, in particular, our ability to generate additional revenues are dependent on many factors, including our ability to successfully commercialize XERMELO in the United States; the amount and timing of payments, if any, under our existing collaboration agreements with Sanofi, Ipsen and other entities; the success of our ongoing preclinical and clinical development efforts; our success in establishing new collaborations and licenses; the timing and willingness of

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such new collaborators to commercialize products that would result in milestone payments and royalties and their success in such efforts; and general and industry-specific economic conditions which may affect research and development expenditures.

Future revenues from our commercialization of XERMELO are uncertain because they depend on a number of factors, including market acceptance of XERMELO, the success of our sales, marketing, medical affairs, distribution and other commercialization activities and the cost and availability of reimbursement for XERMELO.

Future revenues from our existing collaborations are uncertain because they depend, to a large degree, on the achievement of milestones and payment of royalties we earn from any future products developed under the collaborations. Our ability to secure future revenue-generating agreements will depend upon our ability to address the needs of our potential future collaborators and licensees, and to negotiate agreements that we believe are in our long-term best interests.  We may determine, as we have with certain of our drug candidates, including XERMELO in the United States and Japan, that our interests are better served by retaining rights to our discoveries and advancing our therapeutic programs to a later stage, which could limit our near-term revenues and increase expenses.  Because of these and other factors, our operating results have fluctuated in the past and are likely to do so in the future, and we do not believe that period-to-period comparisons of our operating results are a good indication of our future performance.

Since our inception, we have incurred significant losses and, as of March 31, 2017, we had an accumulated deficit of $1.3 billion. Our losses have resulted principally from costs incurred in research and development, general and administrative costs associated with our operations, and non-cash stock-based compensation expenses associated with stock options and restricted stock granted to employees and consultants. Research and development expenses consist primarily of salaries and related personnel costs, external research costs related to our nonclinical and clinical efforts, material costs, facility costs, depreciation on property and equipment, and other expenses related to our drug discovery and development programs. General and administrative expenses consist primarily of salaries and related expenses for executive and administrative personnel, professional fees and other corporate expenses, including information technology, facilities costs and general legal activities. We expect to continue to incur significant research and development costs in connection with the continuing development of our drug candidates. As a result, we will need to generate significantly higher revenues to achieve profitability.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.  We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Recent Accounting Pronouncements

See Note 2, Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements (unaudited), for a discussion of the impact of the new accounting standards on our consolidated financial statements (unaudited).

Results of Operations

Revenues

Total revenues and dollar and percentage changes as compared to the corresponding period in the prior year are as follows (dollar amounts are presented in millions):

	Three Months Ended March 31,
	2017			2016
Total revenues	$	18.3		$	12.5
Dollar increase	$	5.8
Percentage increase	46		%

• Net product revenue – Net product revenue for the three months ended March 31, 2017 was $0.7 million due to revenues recognized from the sale of XERMELO in the United States. Product revenues are recorded net of estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance. Revenue recognition policies require estimates of the aforementioned sales allowances each period.

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• Collaborative agreements – Revenue from collaborative agreements for the three months ended March 31, 2017 increased 41% to $17.6 million, primarily due to revenues recognized from the collaboration and license agreement with Sanofi.

Cost of Sales

Cost of sales for the three months ended March 31, 2017 was $0.2 million. We began capitalizing inventory during the three months ended March 31, 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to FDA approval were recorded as research and development expenses in the consolidated statements of operations. Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The pre-commercialization inventory is expected to be sold over approximately the next two years. As a result, cost of sales for the next two years will reflect a lower average per unit cost of materials. Cost of sales for the three months ended March 31, 2017 includes $0.1 million of amortization of intangible assets relating to XERMELO.

Research and Development Expenses

Research and development expenses and dollar and percentage changes as compared to the corresponding period in the prior year are as follows (dollar amounts are presented in millions):

	Three Months Ended March 31,
	2017			2016
Total research and development expense	$	43.6		$	37.0
Dollar increase	$	6.6
Percentage increase	18		%

Research and development expenses consist primarily of third-party and other services principally related to nonclinical and clinical development activities, salaries and other personnel-related expenses, stock-based compensation expense, and facility and equipment costs.

• Third-party and other services – Third-party and other services for the three months ended March 31, 2017 increased 15% to $34.1 million as compared to the corresponding period in 2016, primarily due to increases in external clinical development costs relating to sotagliflozin. Third-party and other services relate principally to our clinical trial and related development activities, such as nonclinical and clinical studies and contract manufacturing.

• Personnel – Personnel costs for the three months ended March 31, 2017 increased 31% to $6.0 million, as compared to the corresponding period in 2016, primarily due to increases in personnel. Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs.

• Stock-based compensation – Stock-based compensation expense for the three months ended March 31, 2017 increased 20% to $1.2 million, as compared to the corresponding period in 2016.

• Facilities and equipment – Facilities and equipment costs for the three months ended March 31, 2017 decreased 17% to $0.8 million, as compared to the corresponding period in 2016.

• Other – Other costs for the three months ended March 31, 2017 increased 63% to $1.6 million, as compared to the corresponding period in 2016.

Increase in Fair Value of Symphony Icon Liability

The fair value of the Symphony Icon purchase liability increased by $2.1 million and $1.0 million in the three months ended March 31, 2017 and 2016, respectively (see Note 6, Arrangements with Symphony Icon, Inc., of the Notes to Consolidated Financial Statements (unaudited), for more information).

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General and Administrative Expenses

General and administrative expenses and dollar and percentage changes as compared to the corresponding period in the prior year are as follows (dollar amounts are presented in millions):

	Three Months Ended March 31,
	2017			2016
Total general and administrative expense	$	14.9		$	8.4
Dollar increase	$	6.5
Percentage increase	77		%

General and administrative expenses consist primarily of personnel costs to support our research and development activities, professional and consulting fees, stock-based compensation expenses, and facility and equipment costs.

• Personnel – Personnel costs for the three months ended March 31, 2017 increased 157% to $8.1 million, as compared to the corresponding period in 2016, primarily due to increases in personnel, including increases in sales and marketing personnel, in connection with commercialization of XERMELO. Salaries, bonuses, employee benefits, payroll taxes, recruiting and relocation costs are included in personnel costs.

• Professional and consulting fees – Professional and consulting fees for the three months ended March 31, 2017 increased 11% to $3.7 million, as compared to the corresponding period in 2016, primarily due to increased marketing and consulting costs in connection with commercialization of XERMELO.

• Stock-based compensation – Stock-based compensation expense for the three months ended March 31, 2017 increased 24% to $1.0 million, as compared to the corresponding period in 2016.

• Facilities and equipment – Facilities and equipment costs for the three months ended March 31, 2017 increased 27% to $0.5 million, as compared to the corresponding period in 2016.

• Other – Other costs for the three months ended March 31, 2017 increased 132% to $1.5 million, as compared to the corresponding period in 2016, primarily due to increases in travel and contribution to a foundation supporting carcinoid syndrome patients.

Interest Expense and Interest and Other Income (Expense), Net

Interest Expense.  Interest expense for each of the three months ended March 31, 2017 and 2016 was $1.6 million.

Interest and Other Income (Expense), Net. Interest and other income, net for the three months ended March 31, 2017 and 2016 was $0.5 million and $0.6 million, respectively.

Income Tax Benefit

The income tax benefit for the three months ended March 31, 2017 was $8.7 million. During the three months ended March 31, 2017, the Company’s valuation allowance for its deferred tax assets decreased by $8.7 million due to the reclassification of intangible assets relating to XERMELO from indefinite-lived to finite-lived assets, which resulted in the related deferred tax liability now being considered a source of taxable income. The Company recorded a $8.7 million deferred tax benefit with a corresponding reduction in its deferred tax liability in the three months ended March 31, 2017 as a result of this reclassification.

Consolidated Net Loss and Consolidated Net Loss per Common Share

Consolidated Net Loss and Consolidated Net Loss per Common Share. Consolidated net loss was $34.9 million in the three months ended March 31, 2017, consistent with the corresponding period in 2016. Consolidated net loss per common share decreased to $0.33 in the three months ended March 31, 2017 from $0.34 in the corresponding period in 2016.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future, and we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

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Liquidity and Capital Resources

We have financed our operations from inception primarily through sales of common and preferred stock, contract and milestone payments to us under our strategic and other collaborations, target validation, database subscription and technology license agreements, government grants and contracts, and financing under debt and lease arrangements. We have also financed certain of our research and development activities under our agreements with Symphony Icon, Inc. From our inception through March 31, 2017, we had received net proceeds of $1.3 billion from issuances of common and preferred stock. In addition, from our inception through March 31, 2017, we received $794.5 million in cash payments from strategic and other collaborations, target validation, database subscription and technology license agreements, sales of compound libraries and reagents, product sales, and government grants and contracts, of which $699.3 million had been recognized as revenues through March 31, 2017.

As of March 31, 2017, we had $259.7 million in cash, cash equivalents and investments. As of December 31, 2016, we had $346.5 million in cash, cash equivalents and investments. We used cash of $85.5 million in operations in the three months ended March 31, 2017. This consisted primarily of a net decrease in other operating liabilities net of assets of $47.0 million, the consolidated net loss for the period of $34.9 million and the deferred tax benefit of $8.7 million, partially offset by non-cash charges of $2.2 million related to stock-based compensation expense, $2.1 million related to the increase in fair value of the Symphony Icon purchase liability, and $0.6 million related to depreciation and amortization expense. Investing activities provided cash of $42.5 million in the three months ended March 31, 2017, primarily due to net maturities of investments of $42.5 million. Financing activities used cash of $1.1 million, primarily due to repurchase of common stock of $1.7 million and repayment of debt borrowings of $0.5 million, partially offset by proceeds from issuance of common stock of $1.1 million.

Texas Institute for Genomic Medicine. In July 2005, we received an award from the Texas Enterprise Fund for the creation of a knockout mouse embryonic stem cell library containing 350,000 cell lines for the Texas Institute for Genomic Medicine, or TIGM, using our proprietary gene trapping technology, which we completed in 2007. We also equipped TIGM with the bioinformatics software required for the management and analysis of data relating to the library. The Texas Enterprise Fund made an additional award to the Texas A&M University System for the creation of facilities and infrastructure to house the library.

Under the terms of our award, we are responsible for the creation of a specified number of jobs beginning in 2012, reaching an aggregate of 1,616 new jobs in Texas by December 31, 2016. We will receive credits against those job obligations based on funding received by TIGM and certain related parties from sources other than the State of Texas. We will also receive credits against those jobs obligations for any surplus jobs we create. We may be required to repay the state a portion of the award if we fail to meet those job obligations. Subject to these credits, if we fail to create the specified number of jobs, the State may require us to repay $2,415 for each job we fall short beginning in 2013. Our maximum aggregate exposure for such payments, if we fail to create any new jobs, is approximately $14.2 million, including $10.3 million through 2017, without giving effect to any credits to which we may be entitled.

Facilities. In April 2004, we obtained a $34.0 million mortgage on our facilities in The Woodlands, Texas. The mortgage loan originally had a ten-year term with a 20-year amortization and a fixed interest rate of 8.23%. The mortgage was amended in September 2013 to extend the maturity date from April 2014 to April 2017, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged.  The mortgage had a principal balance outstanding of $15.8 million as of March 31, 2017. The entire principal balance is recorded as current portion of long-term debt in the accompanying consolidated balance sheet as of March 31, 2017 as there was a balloon payment due in April 2017. The mortgage was amended in April 2017 to extend the maturity date from April 2017 to April 2018, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged.

In March 2015, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc. leased a 25,000 square-foot office space in Basking Ridge, New Jersey. The term of the lease extends from June 1, 2015 through December 31, 2022, and provides for escalating yearly base rent payments starting at $482,000 and increasing to $646,000 in the final year of the lease. We are the guarantor of the obligations of our subsidiary under the lease.

Our future capital requirements will be substantial and will depend on many factors, including the market acceptance and commercial success of XERMELO in the United States and the revenues we generate from that approved product; the results of our Phase 3 development of sotagliflozin in type 1 diabetes patients; the progress and scope of Sanofi’s development activities with respect to sotagliflozin in type 2 diabetes patients; the timing, progress and results of clinical trials of our other drug candidates; the amount and timing of payments, if any, under our existing collaboration agreements with Sanofi, Ipsen and other entities; the amount and timing of our research, development and commercialization expenditures; the resources we devote to developing and supporting our products and other factors.  Our capital requirements will also be affected by any expenditures we make in connection with license agreements and acquisitions of and investments in complementary

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technologies and businesses.  We expect to devote substantial capital resources to commercialize XERMELO; to complete Phase 3 development and seek regulatory approval in the United States for sotagliflozin in type 1 diabetes; to our clinical development efforts with respect to our other drug candidates; and for other general corporate activities.  We believe that our current unrestricted cash and investment balances and cash and revenues we expect to derive from sales of XERMELO, strategic and other collaborations and other sources will be sufficient to fund our operations for at least the next 12 months.  During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirements, we will need to sell additional equity or debt securities or obtain additional credit arrangements.  Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.

Disclosure about Market Risk

We are exposed to limited market and credit risk on our cash equivalents which have maturities of three months or less at the time of purchase. We maintain a short-term investment portfolio which consists of U.S. Treasury bills and corporate debt securities that mature three to 12 months from the time of purchase, which we believe are subject to limited market and credit risk. We currently do not hedge interest rate exposure or hold any derivative financial instruments in our investment portfolio.

We had approximately $259.7 million in cash and cash equivalents and short-term investments as of March 31, 2017. We believe that the working capital available to us will be sufficient to fund our operations for at least the next 12 months.

We have operated primarily in the United States and substantially all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Disclosure about Market Risk” under “Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations” for quantitative and qualitative disclosures about market risk.

Item 4. Controls and Procedures

Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in the reports we file under the Securities Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness, based on an evaluation of such controls and procedures as of the end of the period covered by this report.

During the three months ended March 31, 2017, we implemented processes and internal controls to record net product revenue, cost of sales, and inventory as a result of the FDA approval and commercial launch of XERMELO. The implementation of these processes resulted in changes to internal control over financial reporting, which we believe were material. There were no other changes in our internal control over financial reporting during the three months ended March 31, 2017 identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II -- Other Information 

Item 1. Legal Proceedings

We are from time to time party to claims and legal proceedings that arise in the normal course of our business and that we believe will not have, individually or in the aggregate, a material adverse effect on our results of operations, financial condition or liquidity.

Item 1A. Risk Factors

The following risks and uncertainties are important factors that could cause actual results or events to differ materially from those indicated by forward-looking statements. The factors described below are not the only ones we face and additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Need for Additional Financing and Our Financial Results

• We will need additional capital in the future and, if it is unavailable, we will be forced to delay, reduce or eliminate our commercialization efforts or product development programs. If additional capital is not available on reasonable terms, we will be forced to obtain funds, if at all, by entering into financing agreements on unattractive terms.

• We have a history of net losses, and we expect to continue to incur net losses and may not achieve or maintain profitability.

• Our operating results have been and likely will continue to fluctuate, and we believe that period-to-period comparisons of our operating results are not a good indication of our future performance.

• We have substantial indebtedness that may limit cash flow available to invest in the ongoing needs of our business.

• We may not have the ability to raise the funds necessary to repurchase the notes evidencing our existing indebtedness upon a fundamental change, and our future debt may contain limitations on our ability to repurchase the notes.

Risks Related to the Commercialization or Development of XERMELO and Our Drug Candidates

• We will depend heavily on the commercial success of XERMELO in the United States. If we do not achieve commercial success with XERMELO, our business will suffer and our stock price will likely decline.

• Clinical testing of our drug candidates in humans is an inherently risky and time-consuming process that may fail to demonstrate safety and efficacy, which could result in the delay, limitation or prevention of regulatory approval.

• Our drug candidates are subject to a lengthy and uncertain regulatory process that may not result in the necessary regulatory approvals, which could adversely affect our and our collaborators’ ability to commercialize products.

• The commercial success of XERMELO and any other products that we or our collaborators may develop will depend upon the degree of market acceptance among physicians, patients, health care payers, private health insurers and the medical community.

• If we are unable to implement and maintain an effective and specialized sales force, marketing infrastructure and distribution capabilities, we will not be able to commercialize XERMELO or our drug candidates successfully.

• If we are unable to obtain adequate coverage and reimbursement from third-party payors for XERMELO and any other products that we or our collaborators may develop, our revenues and prospects for profitability will suffer.

• We and our collaborators are subject to extensive and rigorous ongoing regulation relating to XERMELO and any other approved products.

• We are subject to certain healthcare laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.

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• Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may negatively affect our revenues and prospects for profitability.

• Our competitors may develop products that make XERMELO or our collaborators’ other products obsolete.

• We may not be able to manufacture our drug candidates in commercial quantities, which would prevent us from commercializing our drug candidates.

Risks Related to Our Relationships with Third Parties

• We depend on third-party manufacturers, including sole source suppliers, to manufacture commercial quantities of XERMELO. We may not be able to maintain these relationships and could experience supply disruptions outside of our control.

• We rely on a single third-party logistics provider and two independent specialty pharmacies for distribution of XERMELO in the United States, and their failure to distribute XERMELO effectively would adversely affect sales of XERMELO.

• We are significantly dependent upon our collaborations with Ipsen, Sanofi and other pharmaceutical and biotechnology companies. If pharmaceutical products are not successfully and timely developed and commercialized under our collaborations, our opportunities to generate revenues from milestones and royalties will be greatly reduced.

• Conflicts with our collaborators could jeopardize the success of our collaborative agreements and harm our product development efforts.

• We rely on third parties to carry out drug development activities.

• We lack the capability to manufacture materials for nonclinical studies, clinical trials or commercial sales and rely on third parties to manufacture our drug candidates, which may harm or delay our product development and commercialization efforts.

Risks Related to Our Intellectual Property

• If we are unable to adequately protect our intellectual property, third parties may be able to use our products and technologies, which could adversely affect our ability to compete in the market.

• We may be involved in patent litigation and other disputes regarding intellectual property rights and may require licenses from third parties for our planned nonclinical and clinical development and commercialization activities. We may not prevail in any such litigation or other dispute or be able to obtain required licenses.

• We have not sought patent protection outside of the United States for some of our inventions, and some of our licensed patents only provide coverage in the United States. As a result, our international competitors could be granted foreign patent protection with respect to our discoveries.

• We may be subject to damages resulting from claims that we, our employees or independent contractors have wrongfully used or disclosed alleged trade secrets of their former employers.

Risks Related to Employees, Advisors and Facilities Operations

• The loss of key personnel or the inability to attract and retain additional personnel could impair our ability to expand our operations.

• Our collaborations with outside scientists may be subject to restriction and change.

• Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.

• Facility security breaches may disrupt our operations and harm our operating results.

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• Our facilities are located near coastal zones, and the occurrence of a hurricane or other disaster could damage our facilities and equipment, which could harm our operations.

Risks Related to Environmental and Product Liability

• We have used hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

• Our business has a substantial risk of product liability and we face potential product liability exposure far in excess of our limited insurance coverage.

Risks Related to Our Common Stock

• Invus, L.P., Invus C.V. and their affiliates own a controlling interest in our outstanding common stock and may have interests which conflict with those of our other stockholders.

• Conversion of the notes evidencing our current indebtedness may dilute the ownership interest of our existing stockholders, including holders who had previously converted their notes, or may otherwise depress the price of our common stock.

• Invus has additional rights under our stockholders’ agreement with Invus, L.P. which provides Invus with substantial influence over certain significant corporate matters.

• Our stock price may be extremely volatile.

• We may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize anticipated benefits.

• Future sales of our common stock, or the perception that such sales may occur, may depress our stock price.

• If we are unable to meet Nasdaq continued listing requirements, Nasdaq may take action to delist our common stock.

For additional discussion of the risks and uncertainties that affect our business, see “Item 1A. Risk Factors” included in our annual report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 21, 2017, we issued 659,905 shares of our common stock to certain designees of Symphony Icon Holdings LLC, or Holdings, in partial satisfaction of our payment obligations to Holdings under our amended and restated purchase option agreement with Holdings and Symphony Icon, Inc., as amended. In February 2017, we received regulatory approval in the United States for the marketing and sale of XERMELO, triggering our obligation to pay a buyout amount of $21,013,000 to Holdings pursuant to the terms of the purchase option agreement. We issued the shares in payment of 50% of such buyout amount based on a value of approximately $15.92 per share in accordance with the terms of the purchase option agreement. Such shares were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended.

The following table provides information about our purchases of shares of our common stock during the three months ended March 31, 2017:

Period	Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(3)
January 1-31, 2017	—		$	—		—	—
February 1-28, 2017	102,052	(1)	$	16.45	(2)	—	—
March 1-31, 2017	—		$	—		—	—

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(1) Represents shares retained by us in satisfaction of the tax withholding obligations of recipients of restricted stock units granted in February 2013, February 2014, February 2015 and February 2016 under our Equity Incentive Plan with respect to the vesting of such restricted stock units.

(2) Represents the market price of our common stock on the date of vesting of such restricted stock units, calculated in accordance with the process for determination of fair market value under our Equity Incentive Plan.

(3) In the future, we may grant additional equity securities under our Equity Incentive Plan for which the recipient's tax withholding obligations with respect to the grant or vesting of such securities may be satisfied by our retention of a portion of such securities. Further, for any such equity securities which are subject to vesting conditions, the number of equity securities which we may retain in satisfaction of the recipient's tax withholding obligations may be dependent on the continued employment of such recipient or other performance-based conditions. Accordingly, we cannot predict with any certainty either the total amount of equity securities or the approximate dollar value of such securities that we may purchase in future years.

Item 6. Exhibits

Exhibit No.		Description
*†10.1	—	Commercial Supply Agreement, dated June 6, 2016, with Catalent CTS, LLC
10.2	—	Sixth Amendment to Loan and Security Agreement and to Other Loan Documents, dated April 20, 2017, between Lex-Gen Woodlands, L.P. and iStar Lex Lender LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 20, 2017 and incorporated by reference herein).
10.3	—	2017 Equity Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
10.4	—	2017 Non-Employee Directors’ Equity Incentive Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
10.5	—	Summary of Non-Employee Director Compensation (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
*31.1	—	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	—	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	—	Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	—	XBRL Instance Document
101.SCH	—	XBRL Taxonomy Extension Schema Document
101.CAL	—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	—	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	—	XBRL Taxonomy Extension Presentation Linkbase Document

_____________________

*	Filed herewith.
†	Confidential treatment has been requested for a portion of this exhibit.  The confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.

29

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Lexicon Pharmaceuticals, Inc.
Date:	May 4, 2017	By:	/s/ Lonnel Coats
			Lonnel Coats
			President and Chief Executive Officer

Date:	May 4, 2017	By:	/s/ Jeffrey L. Wade
			Jeffrey L. Wade
			Executive Vice President, Corporate and Administrative Affairs and Chief Financial Officer

30

Index to Exhibits

Exhibit No.		Description
*†10.1	—	Commercial Supply Agreement, dated June 6, 2016, with Catalent CTS, LLC
10.2	—	Sixth Amendment to Loan and Security Agreement and to Other Loan Documents, dated April 20, 2017, between Lex-Gen Woodlands, L.P. and iStar Lex Lender LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 20, 2017 and incorporated by reference herein).
10.3	—	2017 Equity Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
10.4	—	2017 Non-Employee Directors’ Equity Incentive Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
10.5	—	Summary of Non-Employee Director Compensation (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated April 27, 2017 and incorporated by reference herein).
*31.1	—	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	—	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	—	Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	—	XBRL Instance Document
101.SCH	—	XBRL Taxonomy Extension Schema Document
101.CAL	—	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	—	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	—	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	—	XBRL Taxonomy Extension Presentation Linkbase Document

_____________________

*	Filed herewith.
†	Confidential treatment has been requested for a portion of this exhibit.  The confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.

31

EX-10.1

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

Exhibit 10.1

COMMERCIAL SUPPLY AGREEMENT

(Telotristat Etiprate (LX-1606 Hippurate) immediate release compressed powder 250mg

tablets (as free base))

This Commercial Supply Agreement (“Agreement”) is made as of this 6^th day of June, 2016 (“Effective Date”), by and between Lexicon Pharmaceuticals, Inc., a Delaware corporation, with a place of business at 8800 Technology Forest Place, The Woodlands, TX 77381 (“Client”), and Catalent CTS, LLC, a Delaware limited liability company, with a place of business at 10245 Hickman Mills Drive, Kansas City, MO 64137, USA (“Catalent”).

RECITALS

A.Client is a company that develops, markets and sells pharmaceutical products;

B.Catalent is a leading provider of advanced technologies, and development, manufacturing and packaging services for pharmaceutical, biotechnology and consumer healthcare companies;

C.Client desires to engage Catalent to provide certain services to Client in connection with the processing of Client’s Product, and Catalent desires to provide such services, all pursuant to the terms and conditions set forth in this Agreement.

THEREFORE, in consideration of the mutual covenants, terms and conditions set forth below, the parties agree as follows:

ARTICLE 1

DEFINITIONS

The following terms have the following meanings in this Agreement:

1.1    “Acknowledgement” has the meaning set forth in Section 4.3(B).

1.2    “Adverse Supply Event” means (i) any failure by Catalent to tender for delivery at least [**] of the quantities of Product specified in the Firm Commitment within [**] of the scheduled delivery date and (ii) which failure described in clause (i) continues uncured for at least [**]. Notwithstanding the foregoing, the following does not constitute an Adverse Supply Event (w) an investigation of a deviation in a Batch(es) from the warranty set forth in Section 12.1, where the cause of such deviation is agreed by the parties or determined by a mutually acceptable independent third party to be outside of Catalent’s reasonable control; (x) Purchase Orders for quantities of Product that exceed an applicable Firm Commitment; (y) delays in tender of delivery of Product due to Client’s failure to supply Catalent with sufficient quantities of Client-supplied Materials which meet the Specifications by the Processing Date; or (z) a force majeure event in accordance with Section 18.14.

1.3    “Affiliate(s)” means, with respect to Client or any third party, any corporation, firm, partnership or other entity that controls, is controlled by or is under common control with such entity; and with respect to Catalent, Catalent Pharma Solutions, Inc. and any corporation, firm, partnership or other entity controlled by it. For the purposes of this definition, “control” means the ownership of at least 50% of the voting share capital of an entity or any other comparable equity or ownership interest; provided, that Invus, L.P., a Bermuda limited partnership, and Affiliates of Invus, L.P. that would not otherwise be Affiliates of Client but for Invus, L.P.’s ownership of Client’s capital stock, shall be deemed not to be Affiliates of Client.

1.4    “Agreement” has the meaning set forth in the introductory paragraph, and includes all its Attachments and other appendices (all of which are incorporated herein by reference) and any amendments to any of the foregoing made as provided herein or therein.

1.5    “API” means the compound Telotristat Etiprate, as further described in the Specifications, that has been released by Client and provided to Catalent, along with a certificate of analysis, as provided in this Agreement.

1.6    “Applicable Laws” means, with respect to Client, all laws, ordinances, rules and regulations, currently in effect or enacted or promulgated during the Term, and as amended from time to time, of each jurisdiction in which API or Product is produced, marketed, distributed, used or sold; and with respect to Catalent, (a) all laws, ordinances, rules and regulations, currently in effect or enacted or promulgated during the Term, and as amended from time to time, of [**], and (b) cGMP. The laws, ordinances, rules and regulations of additional jurisdictions may be included in the scope of this definition with respect to Catalent only upon written

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

agreement of the parties, such agreement to be considered in good faith and not to be unreasonably withheld or delayed and solely to the extent (A) such jurisdictions are within the Territory and (B) [**].

1.7    “Batch” means a defined quantity of Product that has been or is being Processed in accordance with the Specifications.

1.8    “Catalent” has the meaning set forth in the introductory paragraph, or any successor or permitted assign. Catalent shall have the right to cause any of its Affiliates that are able to perform such obligations in compliance with Applicable Laws (including any applicable manufacturing license required by Applicable Laws) to perform any of its obligations hereunder. In such case, Client shall accept such performance as if it were performance by Catalent and Catalent shall remain responsible for such performance.

1.9    “Catalent Defective Processing” has the meaning set forth in Section 5.2.

1.10    “Catalent Indemnitees” has the meaning set forth in Section 13.2.

1.11    “Catalent Inventions” has the meaning set forth in Article 11.

1.12    “Catalent IP” has the meaning set forth in Article 11.

1.13    “Catalent Release” has the meaning set forth in Section 5.1(A).

1.14    “Certificate of Analysis” as to any Product, means a certificate attesting to the results of testing of such Product against the criteria specified in relevant Specifications, and including test methods, specification parameters and the pass/fail criteria, used to show that a particular Batch of Product meets Specifications.

1.15    “Certificate of Conformance” or “Certificate of Manufacture” means a certificate attesting that a particular Batch of Product was Processed in accordance with cGMP and the final executed Batch production and quality control records.

1.16    “cGMP” means current Good Manufacturing Practices promulgated by the Regulatory Authorities in [**]. In the United States, this includes 21 C.F.R. Parts 210 and 211, as amended; and in the European Union, this includes 2003/94/EEC Directive (as supplemented by Volume 4 of EudraLex published by the European Commission), as amended, if and as implemented in the relevant constituent country.

1.17    “Client” has the meaning set forth in the introductory paragraph, or any successor or permitted assign.

1.18    “Client Indemnitees” has the meaning set forth in Section 13.1.

1.19    “Client Inventions” has the meaning set forth in Article 11.

1.20    “Client IP” has the meaning set forth in Article 11.

1.21    “Client Licensee” means any third party, other than Client’s Affiliates, to whom Client has granted a license for the commercialization of the Product in the Territory and for whom quantities of the Product are being Processed hereunder.

1.22    “Client-supplied Materials” means any materials to be supplied by or on behalf of Client to Catalent for Processing, as provided in Attachment B, including API and reference standards.

1.23    “Commencement Date” means [**].

1.24    “Confidential Information” has the meaning set forth in Section 10.1.

1.25    “Contract Year” means each consecutive 12 month period beginning on the Commencement Date or anniversary thereof, as applicable.

1.26    “Critical Components” means any Raw Materials which are critical to the Processing of Products hereunder and are either (a) subject to ordering lead times from suppliers which are significantly longer than those customary in the industry for raw materials or other components of a similar nature or (b) available for purchase in the quantities necessary for the Processing of Products in the quantities specified in the Rolling Forecast hereunder from fewer than three (3) reputable qualified suppliers.

1.27    “Defective Product” has the meaning set forth in Section 5.2.

1.28    “Delayed Approval Fee” has the meaning set forth in Section 7.3

2

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

1.29    “Discloser” has the meaning set forth in Section 10.1.

1.30    “Effective Date” has the meaning set forth in the introductory paragraph.

1.31    “Exception Notice” has the meaning set forth in Section 5.2.

1.32    “Exclusivity Period” has the meaning set forth in Section 2.2.

1.33    “Facility” means Catalent’s facility located in [**]; or such other facility as agreed by the parties.

1.34    “Facility Approval” has the meaning set forth in Section 9.2.

1.35    “FDA” means the United States Food and Drug Administration.

1.36    “Firm Commitment” has the meaning set forth in Section 4.2.

1.37    “Invention” has the meaning set forth in Article 11.

1.38    “Latent Defect” means any defect that existed at the time of delivery and was not reasonably discoverable upon initial inspection and testing by Client or Client’s designee.

1.39    “Losses” has the meaning set forth in Section 13.1.

1.40    “Minimum Capacity” has the meaning set forth in Section 4.1

1.41    “Minimum Requirement” has the meaning set forth in Section 4.1.

1.42    “Process” or “Processing” means the compounding, filling or pressing, producing and bulk packaging of Client-supplied Materials and Raw Materials into Product by Catalent, in accordance with the Specifications and under the terms of this Agreement, as well as any testing or quality-related activities required by this Agreement or the Quality Agreement in connection with the foregoing.

1.43    “Processing Date” means the day on which the Product is scheduled to be formulated by Catalent, as identified in an Acknowledgement.

1.44    “Product” means the bulk pharmaceutical product containing the API, as more specifically described in and fully Processed in accordance with the Specifications.

1.45    “Product Maintenance Services” has the meaning set forth in Section 2.3.

1.46    “Purchase Order” has the meaning set forth in Section 4.3(A).

1.47    “Quality Agreement” has the meaning set forth in Section 9.6.

1.48    “Raw Materials” means all raw materials, supplies, components and packaging necessary to Process and ship Product in accordance with the Specifications, as provided in Attachment B, but excluding Client-supplied Materials.

1.49    “Recall” has the meaning set forth in Section 9.5.

1.50    “Recipient” has the meaning set forth in Section 10.1.

1.51    “Regulatory Approval” means any approvals, permits, product licenses, registrations or authorizations, including approvals pursuant to U.S. Investigational New Drug applications, New Drug Applications and Abbreviated New Drug Applications (or equivalent non-U.S. filings, such as European marketing authorization applications), as applicable, of any Regulatory Authorities that are necessary or advisable in connection with the development, manufacture, testing, use, storage, exportation, importation, transport, promotion, marketing, distribution or sale of API or Product worldwide. For clarity, Facility Approvals shall not be considered to be Regulatory Approvals.

1.52    “Regulatory Approval Target Date” means [**].

1.53    “Regulatory Authority” means international, federal, state or local governmental or regulatory bodies, agencies, departments, bureaus, courts or other entities that are responsible for (A) the regulation (including pricing) of any aspect of

3

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

pharmaceutical or medicinal products intended for human use or (B) health, safety or environmental matters generally. In the United States, this includes the FDA; and in the European Union, this includes the European Medicines Agency.

1.54    “Representatives” of an entity means such entity’s duly-authorized officers, directors, employees, agents, accountants, attorneys or other professional advisors.

1.55    “Re-Pricing Date” has the meaning set forth in Section 7.2.

1.56    “Review Period” has the meaning set forth in Section 5.2.

1.57    “Rolling Forecast” has the meaning set forth in Section 4.2.

1.58    “Specifications” means the Processing procedures, processes, directions, requirements, standards, quality control testing and other data and the scope of services as set forth in Attachment B, as modified from time to time in accordance with Article 8.

1.59    “Term” has the meaning set forth in Section 16.1.

1.60    “Territory” means [**] and any other country that the parties agree in writing to add to this definition of Territory in an amendment to this Agreement, but excluding any countries that are listed by the comprehensive sanctions, restrictions or embargoes administered by the United Nations, European Union, United Kingdom, or the United States. Catalent shall not be obliged to Process Products for sale in any of such countries if it is prevented from doing so, or would be required to obtain or apply for special permission to do so, due to any restrictions (such as embargoes) imposed on it by any governmental authorities, including without limitation, those imposed by the U.S. Office of Foreign Assets Control. Catalent shall have no obligation to supply Product to Client for distribution to any countries unless and until the Facilities where such Product is to be Processed are approved by the applicable Regulatory Authority for each country if such approval is legally required.

1.61    “Unit” has the meaning set forth on Attachment C.

1.62    “Unit Pricing” has the meaning set forth in Section 7.1(B).

1.63    “Validation Services” has the meaning set forth in Section 2.1.

1.64    “Vendor” has the meaning set forth in Section 3.2(B).

ARTICLE 2

VALIDATION, PROCESSING & RELATED SERVICES

2.1    Validation Services. Catalent shall perform the Product qualification, validation and stability services described in Attachment A (the “Validation Services”).

2.2    Supply and Purchase of Product. Catalent shall Process Product in accordance with the Specifications, Applicable Laws and the terms and conditions of this Agreement. Except as provided below with respect to an Adverse Supply Event, for a period of [**] following the Commencement Date (the “Exclusivity Period”), Client and its Affiliates shall purchase exclusively from Catalent all of Client’s, its Affiliates’ and Client Licensees’ requirements of Product in the Territory; provided, that such exclusive obligations shall only extend to Client Licensees’ requirements of Product to the extent Client has otherwise agreed to supply Product to such Client Licensees. In the event of an Adverse Supply Event, Client shall have the right to source such Product requirements from an alternative supplier. For the avoidance of doubt, nothing herein shall limit Client’s ability, at its sole discretion, to qualify one or more third parties for the Processing of Product (including allowing such third parties to Process Product in order to generate validation Batches), it being understood that, during the Exclusivity Period, Client shall not obtain Product for commercial sale from third parties unless an Adverse Supply Event has occurred. Catalent shall use its commercially reasonable efforts to provide reasonable customary technical assistance to Client, as reasonably requested by Client, in connection with Client’s efforts to qualify one or more third parties for the Processing of Product as described above in a timely and orderly manner at Catalent’s then-prevailing rates for such services; provided, however, that such “reasonable customary technical assistance” shall not include (i) [**]; (ii) [**]; or (iii) [**].

2.3    Product Maintenance Services. Catalent will provide and Client will receive those product maintenance services specified in Attachment D (the “Product Maintenance Services”).

2.4    Other Related Services. Catalent shall provide other Product-related services, other than Validation Services, Processing or Product Maintenance Services, as either specified in Attachment D or agreed to in writing by the parties from time to time.

4

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

Such writing shall include the scope and fees for any such services and be appended to this Agreement. The terms and conditions of this Agreement shall govern and apply to such services.

2.5    Risk Management. In order to ensure continuity of supply and in connection with the practice of diligent risk management practices, promptly after the Effective Date, Catalent and Client will confer in good faith and use commercially reasonable efforts to develop, implement and keep current a risk management program for the Processing of Products hereunder, which program shall include a business continuity plan specifying detailed strategies for responses to and recovery from a range of potential disruptive events which could materially and adversely impact the Processing of Products hereunder. Such business continuity plan shall, at a minimum, identify available alternative facilities, infrastructure and adequate inventories, and shall provide for security and protective measures necessary to ensure minimal impact of the range of potential disruptive events on Client and Catalent. For clarity, the business continuity plan does not relieve Catalent from any responsibility and/or liability under this Agreement.

ARTICLE 3

MATERIALS

3.1    Client-supplied Materials.

A.Client shall supply to Catalent for Processing, at Client’s cost, all Client-supplied Materials, in quantities sufficient to meet Client’s requirements for Product. Client shall deliver such items and associated certificates of analysis to the Facility no later than [**] before the Processing Date, unless such Processing requires microbial testing in which case Client shall deliver such Client-supplied Materials no later than [**] before the Processing Date; provided, that such Processing Date shall be communicated to Client in writing sufficiently in advance of its occurrence to reasonably enable Client to meet such obligations. Client shall be responsible at its expense for securing any necessary DEA, export or import, similar clearances, permits or certifications required in respect of such supply. Catalent shall use such items solely for Processing hereunder. Prior to delivery of any such items, Client shall provide to Catalent a copy of all associated material safety data sheets, safe handling instructions and health and environmental information and any Regulatory certifications or authorizations that may be required under Applicable Laws relating to the API and Product, and shall promptly provide any updates thereto.

B.Within [**] following receipt of Client-supplied Materials, Catalent shall inspect such items to verify their identity and test such items as contemplated by the Specifications to confirm that they meet the associated specifications or certificate of analysis or otherwise. In the event that Catalent detects a nonconformity with the Specifications, Catalent shall give Client prompt notice of such nonconformity. Catalent shall not be liable for any defects in Client-supplied Materials, or in Product as a result of defective Client-supplied Materials, unless Catalent failed to properly perform the foregoing obligations. Catalent shall follow Client’s reasonable written instructions in respect of return or disposal of defective Client-supplied Materials, at Client’s cost.

C.Client shall retain title to Client-supplied Materials at all times and shall bear the risk of loss thereof; provided, that during the time Client-supplied Materials are in Catalent’s control, Catalent shall bear the risk of loss of such Client-supplied Materials arising from the negligence or willful misconduct of, or breach of this Agreement or Applicable Laws by, Catalent or its Affiliates, subject to the limitations set forth in Article 14. Promptly following Client’s written request at any time during the Term, Catalent will, at Client’s option, either (i) ship to Client (at Client’s cost) or (ii) make available for collection by Client at the Facility at which such items are stored, any and all Client-supplied Materials (as specified by Client), in either case no later than [**] after Catalent’s receipt of Client’s request. Catalent will reasonably cooperate with and assist Client in connection with any such request.

3.2    Raw Materials.

A.Catalent shall be responsible for procuring, inspecting and releasing adequate Raw Materials as necessary to meet the Firm Commitment, unless otherwise agreed to by the parties in writing. Catalent shall not be liable for any delay in delivery of Product if (i) such delivery delay is caused by Catalent being unable to obtain, in a timely manner, a particular Raw Material necessary for Processing, (ii) Catalent placed orders for such Raw Materials sufficiently in advance of the Processing Date and (iii) Catalent’s inability to obtain such Raw Materials in a timely manner was the result of circumstances outside Catalent’s reasonable control. At all times during the Term, Catalent shall establish and maintain a stock of Raw Materials sufficient to meet the Firm Commitment. In the event that any Raw Material becomes subject to purchase lead time beyond the Firm Commitment time frame, Catalent shall promptly notify Client and the parties will negotiate in good faith an appropriate amendment to this Agreement, including Section 4.2.

5

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

B.In obtaining Raw Materials hereunder, Catalent shall only use those specific suppliers, manufacturers, and/or vendors (“Vendors”) that have been approved by Client in advance. The approved Vendors as of the Effective Date are listed in the Specifications, and the parties agree to update the Specifications to reflect any additions or amendments to the list of Client-approved Vendors. If Client requests Catalent to change a Vendor and the cost of the Raw Material from any such alternate Vendor is greater than Catalent’s costs for the same raw material of equal quality from the existing Vendor, Catalent shall add the difference between Catalent’s cost of the Raw Material and the alternate Vendor’s cost of the Raw Material to the Unit Pricing. If Client requests Catalent to change a Vendor and the cost of the Raw Material from any such alternate Vendor is less than Catalent’s costs for the same raw materials of equal quality from the existing Vendor, Catalent shall subtract the difference between Catalent’s cost of the Raw Material and the alternate Vendor’s cost of the Raw Material from the Unit Pricing. Client will be responsible for all costs associated with qualification of any such Vendor who has not been previously qualified by Catalent.

C.All Raw Materials hereunder, and Catalent’s use thereof in the Processing of Products, shall comply with (a) the specifications applicable thereto as reasonably determined by Client and as set forth in the Specifications, current batch records, and/or other appropriate documentation (provided that such specifications may only be amended upon Client’s prior written approval), (b) all Applicable Laws, the Quality Agreement and all applicable Regulatory Approvals and (c) the use, re-test or expiration date, as applicable, of such Raw Materials, if applicable, in accordance with the recommendations of the manufacturer or Vendor thereof.

D.In the event of (i) a Specification change for any reason, (ii) obsolescence of any Raw Material (which, for clarity, does not include any expiration of the Raw Material) or (iii) termination of this Agreement by Catalent pursuant to Section 16.2, Client shall bear the cost of any unused Raw Materials (including packaging, at Catalent’s cost), so long as Catalent purchased such Raw Materials in quantities consistent with Client’s most recent Firm Commitment and the Vendor’s minimum purchase obligations. Catalent shall employ commercially reasonable efforts to mitigate such costs, including, to the extent approved by Client (1) using such Raw Materials in connection with other activities performed by Catalent, including with respect to the supply of product to third parties or the performance of services on behalf of third parties or (2) returning such Raw Materials to the original Vendor thereof.

E.Catalent shall use commercially reasonable efforts to seek to obtain supply guarantees from the suppliers of any Critical Components in sufficient quantities to meet its Processing requirements hereunder for at least [**] (as contemplated by the Rolling Forecast) or if a supplier is unwilling to agree to such [**] period then for such lesser period as such supplier is willing to guarantee, such guarantee to include the obligation of such suppliers to provide Catalent with at least [**] prior written notice of its intention to cease production of such Critical Components.

3.3    Storage and Use of Client-supplied Materials and Raw Materials.

A.Storage and Use. Catalent will keep and use the Client-supplied Materials only at the designated Facility. Catalent agrees that the Client-supplied Materials will not be removed from such Facility unless Catalent receives prior written notice from Client to move them. Catalent shall provide appropriate storage for Client-supplied Materials at such Facility in accordance with the Specifications and in compliance with Applicable Laws. Catalent shall not handle the Client-supplied Materials except as necessary to Process Products or otherwise as expressly instructed by Client. Catalent shall limit access to the Client-supplied Materials to those of its employees or representatives that require such access for the purposed of Processing Products under this Agreement. Catalent shall ensure that all Raw Materials are stored in accordance with Applicable Laws and any instructions of the applicable Vendor. Catalent shall use the first-in, first-out (FIFO) method of materials storage for Client-supplied Materials, subject to the prudent and appropriate usage of the first expiring, first out (FEFO) method, unless otherwise specified and agreed by the parties. Catalent agrees to use its commercially reasonable efforts to minimize the wastage of Client-supplied Materials and Raw Materials involved in the Processing of Products hereunder. Catalent shall be responsible, at its expense, to obtain and maintain at all times during the term of this Agreement all permits and licenses required for it to carry out its obligations hereunder.

3.4    Artwork and Labeling. Client shall provide or approve, prior to the procurement of applicable Raw Material, all artwork, advertising and labeling information necessary for Processing, if any. Such artwork, advertising and labeling information is and shall remain the exclusive property of Client, and Client shall be solely responsible for the content thereof. Such artwork, advertising and labeling information or any reproduction thereof may not be used by Catalent in any manner other than performing its obligations hereunder. For the avoidance of doubt, Client shall have the right to modify, update or otherwise change any such artwork, advertising and labeling information in its sole discretion, subject to Client’s obligations as set forth in Article 8. In such case, Client shall provide Catalent with all necessary materials with respect thereto, and any such modification, update or change shall be considered a change in the Specifications.

6

Confidential materials omitted and filed separately

with the Securities and Exchange Commission.

Asterisks denote omissions.

ARTICLE 4

MINIMUM REQUIREMENT, PURCHASE ORDERS & FORECASTS

4.1    Minimum Requirement. During each Contract Year, Client shall purchase the minimum number of units of Product set forth on Attachment C (“Minimum Requirement”) and Catalent shall ensure its capacity to Process no fewer than the number of units of Product set forth on Attachment C (the “Minimum Capacity”). If Client does not purchase such Minimum Requirement during any Contract Year, then Client shall make the minimum shortfall unit pricing payments in respect of such Minimum Requirement as contemplated in Attachment C.

4.2    Forecast. On or before the 1^st day of each [**], beginning at least [**] prior to the anticipated Commencement Date, Client shall furnish to Catalent a written [**] rolling forecast of the quantities of Product that Client intends to order from Catalent during such period (“Rolling Forecast”). The first [**] of each Rolling Forecast shall constitute a binding order for the quantities of Product specified in such Rolling Forecast (“Firm Commitment”) and the following [**] of the Rolling Forecast shall be non-binding, good faith estimates.

4.3    Purchase Orders.

A.From time to time as provided in this Section 4.3(A), Client shall submit to Catalent a binding, non-cancelable purchase order for Product specifying the number of Batches to be Processed, the Batch size (to the extent the Specifications permit Batches of different sizes) and the requested delivery date for each Batch (“Purchase Order”). Concurrently with the submission of each Rolling Forecast, Client shall submit a Purchase Order for the Firm Commitment. Purchase Orders for quantities of Product in excess of the Firm Commitment shall be submitted by Client in accordance with lead times mutually agreed by the parties.

B.Within [**] following receipt of a Purchase Order, Catalent shall issue a written acknowledgement (“Acknowledgement”) informing Client that it accepts or rejects such Purchase Order. Each Acknowledgement accepting a Purchase Order shall either confirm the delivery date set forth in the Purchase Order or set forth a reasonable alternative delivery date, and shall include the Processing Date. Catalent may reject any Purchase Order solely (i) to the extent such Purchase Order is for quantities of Product in excess of the Firm Commitment or (ii) if such Purchase Order is otherwise not given in material accordance with this Agreement.

C.Notwithstanding Section 4.3(B), Catalent shall use commercially reasonable efforts to supply Client with quantities of Product in excess of the quantities specified in the Firm Commitment, subject to Catalent’s other supply commitments and manufacturing, packaging and equipment capacity.

D.In the event of a conflict between the terms of any Purchase Order or Acknowledgement and this Agreement, the terms of this Agreement shall control.

4.4    Catalent’s Cancellation of Purchase Orders. Notwithstanding Section 4.5, Catalent reserves the right to cancel all, or any part of, a Purchase Order upon written notice to Client, and Catalent shall have no further obligations or liability with respect to such Purchase Order, if Client refuses or fails to timely supply conforming Client-supplied Materials in accordance with Section 3.1. Any such cancellation of Purchase Orders shall not constitute a breach of this Agreement by Catalent nor shall it absolve Client of its obligation in respect of the Minimum Requirement.

4.5    Client’s Modification or Cancellation of Purchase Orders.

A.Client may modify the delivery date or quantity of Product in a Purchase Order only by submitting a written change order to Catalent at least [**] in advance of the earliest Processing Date (of which Catalent notifies Client in accordance with Section 4.3(B) above) covered by such change order. Such change order shall be effective and binding against Catalent only upon the written approval of Catalent, which shall not be unreasonably withheld or delayed; provided, that Catalent shall use commercially reasonable efforts to implement any change orders submitted by such deadline. Notwithstanding the foregoing, Client shall remain responsible for the Firm Commitment.

B.Notwithstanding any amounts due to Catalent under Section 4.4 or Section 4.1, if Client fails to place Purchase Orders sufficient to satisfy the Firm Commitment, Catalent shall promptly notify Client of the failure, and Client shall have [**] to cure such failure by placing Purchase Orders sufficient to satisfy the Firm Commitment. If Client fails to cure such failure within the [**] period, Client shall pay to Catalent in accordance with Article 7 the Unit Pricing for all Units that would have been Processed if Client had placed Purchase Orders sufficient to satisfy the Firm Commitment and such number of Units shall be counted for purposes of the Minimum Requirement for the applicable Contract Year.

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C.Neither changes to nor postponement of any Batch of Product, nor the payment of the fees described in this Section 4.5, will reduce or in any way effect Client’s Minimum Requirement obligations set forth in Section 4.1.

4.6    Unplanned Delay or Elimination of Processing. Catalent shall use commercially reasonable efforts to meet the quantities of Product and delivery dates specified in the Purchase Orders, subject to the terms and conditions of this Agreement. Catalent shall provide Client with as much advance notice as practicable (and will use commercially reasonable efforts to provide at least [**] advance notice where possible) if Catalent determines that any Processing will be delayed or eliminated for any reason.

4.7    Observation of Processing. In addition to Client’s audit right pursuant to Section 9.4, Client may send a reasonable number of representatives to the Facility to observe Processing activities, the Validation Services and the Product Maintenance Services specifically indicated on Attachment D, in each case for a maximum of [**] per Contract Year (unless otherwise agreed by Catalent in writing), upon at least [**] prior notice, at reasonable times during regular business hours. In addition, Client may visit the Facility for process improvement and other activities, in each case as mutually agreed. Such representatives shall abide by all Catalent safety rules and other applicable employee policies and procedures communicated by Catalent to Client, and Client shall be responsible for such compliance. Client shall indemnify and hold harmless Catalent for any action, omission or other activity of such representatives in breach of such policies and procedures while on Catalent’s premises. Client’s representatives shall be required to sign Catalent’s standard visitor confidentiality agreement prior to being allowed access to the Facility.

ARTICLE 5

TESTING; SAMPLES; RELEASE

5.1    Batch Records and Data; Release. Unless otherwise agreed to by the parties during their ordinary course of dealings, promptly after Catalent completes Processing of a Batch, Catalent shall provide Client with copies of Batch records prepared in accordance with the Specifications; provided, that if testing reveals an out-of-Specification result, Catalent shall provide such Batch records promptly following resolution of the out-of Specification result. After Catalent completes Processing of a Batch, Catalent shall also provide Client or its designee with a Certificate of Analysis and Certificate of Manufacture, or a Certificate of Conformance for such Batch. Issuance of a Certificate of Analysis and Certificate of Manufacture (relating to bulk drug product), and a Certificate of Conformance (for further processing), constitutes release of the Batch by Catalent to Client; and issuance of a Certificate of Conformance constitutes a release of a Batch of finished Product by Catalent to Client (each a “Catalent Release”). Client shall be responsible for final release of Product to the market in reliance on Catalent’s Certificate of Analysis/Certificate of Manufacture or Certificate of Conformance (including testing).

5.2    Testing; Rejection. Following Client’s receipt of a shipment of a Batch, Client or Client’s designee may test samples of such Batch to confirm that the Specifications have been met (or for any other purpose). Unless within [**] after Client’s receipt of a Batch (“Review Period”), Client or its designee notifies Catalent in writing (an “Exception Notice”) that such Batch does not meet the warranty set forth in Section 12.1 (“Defective Product”), and provides a sample of the alleged Defective Product, the Batch shall be deemed accepted by Client and Client shall have no right to reject such Batch, except in the case of a Latent Defect detected within [**] after Client’s receipt of a Batch. In the event of any Latent Defect in a Batch, Client shall provide an Exception Notice notifying Catalent of such Latent Defect promptly following Client’s discovery of such Latent Defect and provide a sample of the alleged Defective Product. Upon timely receipt of an Exception Notice from Client, including with respect to a Latent Defect, Catalent shall conduct an appropriate investigation in its discretion to determine whether or not it agrees with Client that Product is Defective Product and to determine the cause of any nonconformity or Latent Defect. If Catalent agrees that Product is Defective Product and determines that the cause of nonconformity or Latent Defect is attributable to Catalent’s negligence, willful misconduct or breach of its obligations with respect to Processing hereunder (“Catalent Defective Processing”), then Section 5.4 shall apply. For avoidance of doubt, where the cause of nonconformity cannot be determined or assigned, it shall be deemed [**].

5.3    Discrepant Results. If the parties disagree as to whether Product is Defective Product and/or whether the cause of the nonconformity is Catalent Defective Processing, the parties shall use commercially reasonable efforts to resolve such disagreement as promptly as possible. If the parties are unable to resolve such disagreement within [**] of the Exception Notice date, the parties shall cause a mutually acceptable independent third party to review records, test data and to perform comparative tests and/or analyses on samples of the alleged Defective Product and its components, including Client-supplied Materials. The independent party’s results as to whether or not Product is Defective Product and the cause of any nonconformity shall be final and binding. Unless otherwise agreed to by the parties in writing, the costs associated with such testing and review shall be borne by Catalent if Product is Defective Product attributable to Catalent Defective Processing, and by Client in all other circumstances.

5.4    Defective Processing. Catalent shall, at its option, either (A) replace, at its cost and within [**], any Batch of Defective Product attributable to Catalent Defective Processing (and Client shall be liable to pay for either the rejected Batch(es) or the replacement Batch(es), but not both), or (B) credit within [**] any payments made by Client for such rejected Batch. THE

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OBLIGATION OF CATALENT TO REPLACE DEFECTIVE PRODUCT IN ACCORDANCE WITH THE SPECIFICATIONS OR CREDIT PAYMENTS MADE BY CLIENT, IN EACH CASE, WHICH IS ATTRIBUTABLE TO CATALENT DEFECTIVE PROCESSING, SHALL BE CLIENT’S SOLE AND EXCLUSIVE REMEDY UNDER THIS AGREEMENT FOR DEFECTIVE PRODUCT AND IS IN LIEU OF ANY OTHER WARRANTY, EXPRESS OR IMPLIED, SUBJECT, FOR THE AVOIDANCE OF DOUBT, TO ARTICLE 14.

5.5    Supply of Material for Defective Product. In the event Catalent replaces Defective Product pursuant to Section 5.4, Client shall supply, at its cost, Catalent with sufficient quantities of Client-supplied Materials in order for Catalent to complete such replacing and Catalent shall promptly reimburse Client for its costs of such Client-supplied Materials, subject to Catalent’s limitation of liability in Article 14

ARTICLE 6

DELIVERY

6.1    Delivery. Catalent shall deliver Product [**] promptly following Catalent’s Release, and in any event by the scheduled delivery date. Catalent shall segregate and store all Product until tender of delivery. Title to Product shall transfer to Client upon Catalent’s tender of delivery. Client shall qualify at least one (1) carrier to ship Product.

6.2    Storage Fees. If Client fails to take delivery of any Product on any scheduled delivery date, Catalent shall store such Product and Client shall be invoiced monthly following such scheduled delivery for reasonable administration and storage costs as specified in Attachment D.

ARTICLE 7

PAYMENTS

7.1 Fees. In consideration for Catalent performing Services hereunder:

A.Client shall pay to Catalent the fees for Validation Services set forth on Attachment A. Catalent shall submit an invoice to Client for such fees upon the completion of the relevant phase of the Validation Services.

B.Client shall pay Catalent the unit pricing or minimum shortfall unit pricing, as applicable, for Product set forth on Attachment C (“Unit Pricing”). Catalent shall submit an invoice to Client for such fees upon tender of delivery of Product or storage as provided in Article 6.

C.Client shall pay Catalent the annual fees for Product Maintenance Services set forth on Attachment D. Catalent shall submit an invoice to Client for such fees upon the Commencement Date and upon each anniversary of the Commencement Date during the Term.

D.Other Fees. Client shall pay Catalent for all other fees and expenses of Catalent owing in accordance with the terms of this Agreement, including pursuant to Sections 2.2, 2.4, 4.1 6.2, 7.3 and 16.3. Catalent shall submit an invoice to Client for such fees as and when appropriate in the context of such terms of this Agreement.

7.2Unit Pricing Increase. Beginning on January 1, 2017 and continuing on January 1 of each calendar year during the Term thereafter (each a “Re-Pricing Date”), the Unit Pricing, including the minimum shortfall unit pricing, (as set forth on AttachmentC) shall be adjusted on an annual basis, upon [**] prior written notice from Catalent to Client, in proportion to [**].

7.3Product Approval. If any Regulatory Approvals in the United States necessary for Catalent to commence Processing at the Facility have not been obtained by Client by the Regulatory Approval Target Date, then Client shall pay to Catalent the monthly fee as provided in Attachment D (“Delayed ApprovalFee”) until the earlier of (A) the date this Agreement is terminated by a party pursuant to this Section 7.3 or (B) the date such Regulatory Approval has been obtained. If such Regulatory Approval has not been obtained within [**] following the Regulatory Approval Target Date, then Client and Catalent shall each have the right to terminate this Agreement pursuant to Section 16.2(C).

7.4Payment Terms. Payment of all Catalent invoices shall be due [**] after the date of Client’s receipt of invoice. Client shall make payment in U.S. dollars, and otherwise as directed in the applicable invoice. If any payment pursuant to a valid invoice is not received by Catalent by its due date, then Catalent may, in addition to any other remedies available at equity or in law, charge interest on the outstanding sum from the due date (both before and after any judgment) at [**]% per month until paid in full (or, if less, the maximum amount permitted by Applicable Laws).

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7.5Taxes. All taxes, duties and other amounts assessed (excluding tax based on net income and franchise taxes) on Client-supplied Materials, services or Product prior to or upon provision or sale to Catalent or Client, as the case may be, are the responsibility of Client, and Client shall reimburse Catalent for all such taxes, duties or other expenses paid by Catalent or such sums will be added to invoices directed at Client, where applicable, upon presentation of documentation of such payment by Catalent to Client. If any deduction or withholding in respect of tax or otherwise is required by law to be made from any of the sums payable hereunder, Client shall be obliged to pay to Catalent such greater sum as will leave Catalent, after deduction or withholding as is required to be made, with the same amount as it would have been entitled to receive in the absence of any such requirement to make a deduction or withholding.

7.6Client and Third Party Expenses. Except as may be expressly covered by Product Maintenance Service fees, as between the parties hereto, Client shall be responsible for 100% of its own and all third-party expenses associated with the development, Regulatory Approvals and commercialization of Product, including regulatory filings and post-approval marketing studies.

ARTICLE 8

CHANGES TO SPECIFICATIONS

8.1    Changes to Specifications or Processing.

A.Catalent shall not make any changes to Raw Materials (or suppliers thereof), formulations, processes, equipment, tests or any other item in any manner that would adversely impact the Processing activities related to Product to be supplied by Catalent hereunder, or affect any of Client’s Regulatory Approvals (including pending Regulatory Approvals) related to the Product, without Client’s prior written approval.

B.All Specifications and any changes thereto agreed to by the parties from time to time shall be in writing, dated and signed by the parties. Any change to the Process shall be deemed a Specification change. No change in the Specifications shall be implemented by Catalent, whether requested by Client or requested or required by any Regulatory Authority or otherwise, until the parties have agreed in writing to such change, the implementation date of such change, and any increase or decrease in costs, expenses or fees associated with such change (including any change to Unit Pricing). Catalent shall respond promptly to any request made by Client for a change in the Specifications, and both parties shall use commercially reasonable, good faith efforts to agree to the terms of such change in a timely manner; provided, that in the case of any change that is requested by Client in response to (1) requirements imposed by a Regulatory Authority or Applicable Laws or (2) a safety or toxicity issue, the only terms of such change that Catalent may object to are the implementation date of such change, any increase or decrease in costs, expenses or fees associated with such change and any requested change that would reasonably be expected to affect Catalent’s other customers or regulatory status, and Catalent shall use commercially reasonable, good faith efforts to resolve any such objection in a prompt manner. As soon as possible after a request is made for any change in Specifications, Catalent shall notify Client of the costs associated with such change and shall provide such supporting documentation as Client may reasonably require. Client shall pay all reasonable direct costs directly attributable to such agreed upon changes. If there is a conflict between the terms of this Agreement and the terms of the Specifications, this Agreement shall control. Catalent reserves the right to postpone effecting changes to the Specifications until such time as the parties agree to and execute the required written amendment.

8.2    Other Changes. Client may propose to Catalent certain changes to the Specifications or the manufacturing process which it reasonably believes will improve the manufacturing process or lower costs or that Client otherwise wishes to implement in connection with the Product or the Processing thereof. Upon Client’s request, Catalent shall review and analyze any such change and provide a development plan, cost proposal and timeline for the implementation of such change. The parties shall mutually agree on which changes, if any, shall be further developed or implemented in accordance with the change control procedures set forth in the Quality Agreement. Except as the parties may otherwise agree in writing, Catalent and Client shall share equally in any cost savings resulting from the implementation thereof (net of any costs required to implement such change), and promptly following such implementation, the Unit Pricing for the Product payable by Client as set forth on Attachment C shall be reduced to reflect Client’s share of such cost savings.

8.3    Deviations. Without limiting Catalent’s obligations under Article 5, in the event any material deviations occur during the course of the Processing of any Product under this Agreement, Catalent shall promptly provide Client with a detailed written description of any such deviation and, to the extent known by Catalent, an explanation of the cause of such deviation. In addition to the provision of such notice, Catalent shall undertake those actions to investigate the cause of such deviation and to correct the same as set out in the Quality Agreement. Notifications and actions taken by Catalent are governed by the Quality Agreement requirements.

8.4    Process Re-Validation Batches.  In the event that the Process (or any portion of the Process) must be re-validated as a result of any Specification change, each Batch produced under this Agreement following such Specification change, including

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those necessary to support the validation portion of Client’s submissions for Regulatory Approvals, will be considered to be a “development batch” unless and until Processing has been re-validated in accordance with the applicable manufacturing process after implementation of such Specification change.   Client shall be responsible for the cost of each such Batch, even if such Batch fails to meet the Specifications, unless Catalent was grossly negligent in the Processing of the out-of-Specification Batch or otherwise fails to follow the agreed upon manufacturing process.  Catalent and Client shall cooperate in good faith to resolve any problems causing the out-of-Specification Batch.

ARTICLE 9

RECORDS; REGULATORY MATTERS

9.1    Recordkeeping. Catalent shall maintain materially complete and accurate Batch, laboratory data, reports and other technical records and information relating to Processing, including all information required to be maintained by Applicable Laws, in accordance with the Quality Agreement, Catalent standard operating procedures and any other reasonable procedures upon which the parties mutually agree, in each case properly reflecting all Processing activities conducted under this Agreement in sufficient detail and in a manner required by Applicable Law. Such information shall be maintained for a period of at least [**] from the relevant finished Product expiration date or longer if required under Applicable Laws or the Quality Agreement; provided, that prior to Catalent’s destruction of any such data, reports, records or information related to the Processing (which shall not include any of Catalent’s standard operating procedures or Catalent Confidential Information), Catalent shall provide Client with written notice thereof and, if requested by Client, shall transfer such documentation to Client, at Client’s cost with respect to any out-of-pocket costs incurred by Catalent with respect thereto. Without limiting the foregoing, at any time, upon request by Client, and at Client’s cost, Catalent shall provide Client with reasonable access to, and copies of, such data, reports, records and information.

9.2    Regulatory Compliance. Catalent shall obtain and maintain all permits and licenses with respect to general Facility operations required by any Regulatory Authority in the jurisdiction in which Catalent Processes Product (each, a “Facility Approval”). Upon written request, Catalent shall provide Client with copies of all such Facility Approvals. Client shall obtain and maintain all Regulatory Approvals, authorizations and certificates, including those necessary for Catalent to commence Processing. Client shall reimburse Catalent for [**]. Client shall not identify Catalent in any regulatory filing or submission without Catalent’s prior written consent. Such consent shall not be unreasonably withheld and shall be memorialized in a writing signed by authorized representatives of both parties. Upon written request, Client shall provide Catalent with a copy of any Regulatory Approvals required for Client or Client Licensee to distribute, market and sell Product in the Territory. If Client is unable to provide such information following the imposition of a regulatory hold by any Regulatory Authority in the Territory, Catalent shall have no obligation to deliver Product to Client, notwithstanding anything to the contrary in this Agreement, until such time as Client provides Catalent with such information. During the Term, Catalent will assist Client with all regulatory matters relating to Processing, Validation Services or Product Maintenance Services conducted by Catalent hereunder, at Client’s request and expense, including providing all information and data in Catalent’s possession or control necessary or useful for Client to apply for, obtain and maintain Regulatory Approvals for Product in any country within the Territory, including information relating to any Facility and/or Raw Materials, or required or requested to be provided to any Regulatory Authority, in each case, subject to Catalent’s obligations of confidentiality to its other customers and suppliers. Moreover, Client shall have, or cooperate with Catalent to obtain, full access to and the right to use and reference any records, correspondence, validation documentation, Batch records, reports, analyses and any other data and documentation in connection with the Processing, Validation Services or Product Maintenance Services conducted by Catalent hereunder. The parties intend and commit to cooperate to allow each party to satisfy its obligations under Applicable Laws relating to Processing, Validation Services and Product Maintenance Services under this Agreement.

9.3    Governmental Inspections and Requests. Catalent shall promptly advise Client if an authorized agent of any Regulatory Authority notifies Catalent that it intends to or does visit the Facility for the purpose of reviewing the Processing or audit Catalent’s books and records with respect to the Processing. Catalent shall promptly provide Client with a copy of any written document received from such Regulatory Authority relating to such notification, as well as any other request, directive or other communication of any Regulatory Authority relating to the Product or its Processing. Catalent shall permit authorized officials of any Regulatory Authority to inspect the Facility, including the equipment used for the Processing, shipping or receiving of Product and Client-supplied Materials and Raw Materials, as may be required or necessary for the granting or maintaining of any government approvals necessary and/or required to be granted by such Regulatory Authority for the manufacture, import, marketing, distribution and sale of the Product, as well as any documents relevant to the Processing of Product under this Agreement. Catalent shall permit representatives of Client and any Client Licensee to assist in the preparation for and be present at any such inspection of the Facility. Upon request, Catalent shall promptly provide Client with a copy of any report issued by such Regulatory Authority received by Catalent following such visit, redacted as appropriate to protect any confidential information of Catalent and Catalent’s other customers, and notify Client of any actions taken by Catalent to remedy conditions cited in any such report. Prior to responding to any such report, Catalent shall provide Client a copy of its proposed response for Client’s and any Client Licensee’s review and

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comments and Catalent shall take under careful consideration and use good faith efforts to implement any comments or recommendations provided by Client or any Client Licensee with respect thereto directed towards the Product or its Processing prior to submitting such response to the applicable Regulatory Authority. Client acknowledges that it may not direct the manner in which Catalent fulfills its obligations to permit inspection by and to communicate with Regulatory Authorities. Client shall [**].

9.4    Client Facility Audits. During the Term and thereafter as required by Applicable Law, Client’s and Client Licensee’s Representatives, either together or on alternate occasions, shall be granted access upon at least [**] prior notice, at reasonable times during regular business hours, to (A) the portion of the Facility where Catalent performs Processing, Validation Services or Product Maintenance Services or which otherwise has impact on Catalent’s performance of such services, (B) relevant personnel involved in Processing, Validation Services or Product Maintenance Services and (C) Processing, Validation Services and Product Maintenance Services records described in Section 9.1, in each case solely for the purpose of verifying that Catalent is performing the Processing, Validation Services and Product Maintenance Services in accordance with Applicable Law (including cGMP), the Specifications and the Product master Batch records. Without limiting Section 4.7, Client and Client Licensee, collectively, may not conduct an audit under this Section 9.4 more than once during any [**] period; provided, that additional inspections may be conducted in the event there is a material quality or compliance issue concerning Product or its Processing or the Validation Services or Product Maintenance Services. Client’s Quality Assurance Manager will arrange Client and Client Licensee audits with Catalent Quality Management. Audits shall be designed to minimize disruption of operations at the Facility. Client’s and Client Licensee’s Representatives shall be required to sign Catalent’s standard visitor confidentiality agreement prior to being allowed access to the Facility. Such Representatives shall comply with the Facility’s rules and regulations of which they are informed. Client shall indemnify and hold harmless Catalent for any negligent or willful action or activity of such Representatives while on Catalent’s premises.

9.5    Recall. If Catalent believes a recall, field alert, Product withdrawal or field correction (“Recall”) may be necessary with respect to any Product supplied under this Agreement, Catalent shall immediately notify Client in writing. Catalent will not act to initiate a Recall without the express prior written approval of Client, unless otherwise required by Applicable Laws. If Client believes a Recall may be necessary with respect to any Product supplied under this Agreement, Client shall promptly notify Catalent in writing and Catalent shall provide all necessary cooperation and assistance to Client. Client shall provide Catalent with an advance copy of any proposed submission to a Regulatory Authority in respect of any Recall, and shall consider in good faith any comments from Catalent. The cost of any Recall shall be borne by Client, and Client shall reimburse Catalent for expenses incurred in connection with any Recall, except to the extent [**]. For purposes hereof, such cost shall be limited to reasonable, actual and documented administrative costs incurred by Client for such Recall and replacement of the Product subject to Recall in accordance with Article 5. For purposes of this Section 9.5, “administrative costs” shall include, in each case by way of example but not limitation, postage and shipping costs to and from physicians, consumers and distributors, but shall not include Client’s or Client Licensee’s labor costs, costs of consultants, or penalties and fees of any type whatsoever that may be owed to a Regulatory Authority.

9.6    Quality Agreement. Within [**] after the Effective Date, and in any event prior to the first Processing of Product hereunder, the parties shall negotiate in good faith and enter into a quality agreement in substantially the form separately agreed by the parties (the “Quality Agreement”). The Quality Agreement shall in no way determine liability or financial responsibility of the parties for the responsibilities set forth therein. In the event of a conflict between any of the provisions of this Agreement and the Quality Agreement with respect to quality-related activities, including compliance with cGMP, the provisions of the Quality Agreement shall govern. In the event of a conflict between any of the provisions of this Agreement and the Quality Agreement with respect to any commercial matters, including allocation of risk, liability and financial responsibility, the provisions of this Agreement shall govern.

ARTICLE 10

CONFIDENTIALITY AND NON-USE

10.1Definition. As used in this Agreement, the term “Confidential Information” includes all information disclosed or otherwise furnished by or on behalf of Catalent or Client (the “Discloser”), its Affiliates or any of its or their respective Representatives (or, in Client’s case, any Client Licensee), to the other party (the “Recipient”), its Affiliates or any of its or their respective Representatives which relates to the Discloser’s business, products or operations, whether furnished before, on or after the Effective Date and furnished in any form, including written, verbal, visual, electronic or in any other media or manner and information acquired by observation or otherwise during any site visit at the other party’s facility. Confidential Information includes all proprietary technologies, know-how, trade secrets, discoveries, inventions and any other intellectual property (whether or not patented), analyses, compilations, business or technical information and other materials prepared by either party, their respective Affiliates, or any of its or their respective Representatives, containing or based in whole or in part on any information furnished by the Discloser, its Affiliates or any of its or their respective Representatives. Confidential Information also includes the existence

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of this Agreement and its terms. For clarity, it is understood that all Specifications, Client-supplied Materials, Rolling Forecasts, Purchase Orders, and Client Inventions shall be deemed the Confidential Information of Client.

10.2Exclusions. Notwithstanding Section 10.1, Confidential Information does not include information that (A) is or becomes generally available to the public or within the industry to which such information relates other than as a result of a breach of this Agreement, (B) is already known by the Recipient without any obligation of confidentiality at the time of disclosure as evidenced by the Recipient’s written records, (C) becomes available to the Recipient on a non-confidential basis from a source that is entitled to disclose it on a non-confidential basis or (D) was or is independently developed by or for the Recipient without reference to the Confidential Information of the Discloser as evidenced by the Recipient’s written records.

10.3Mutual Obligation. The Recipient agrees that it will not use the Discloser’s Confidential Information except in connection with the performance of its obligations or exercise of its rights hereunder and will not disclose, without the prior written consent of the Discloser, Confidential Information of the Discloser to any third party, except that the Recipient may disclose the Discloser’s Confidential Information to any of its Affiliates and its or their respective Representatives (and in Client’s case, to any Client Licensee) that (A) need to know such Confidential Information for the purpose of performing its obligations or exercising its rights under this Agreement, (B) are advised of the confidential nature of the Confidential Information and (C) are bound to the Recipient by obligations of confidentiality at least as restrictive as the terms of this Article. Each party shall be responsible for any breach of this Article by its Affiliates or any of its or their respective Representatives. The Recipient may also disclose the Discloser’s Confidential Information to its bona fide investors, potential acquirers or licensors (in each case, which is not a direct competitor of the Discloser); provided that the Recipient shall be liable for any breach of such confidentiality and non-use obligations by such entities.

10.4Permitted Disclosure. The Recipient may disclose the Discloser’s Confidential Information to Regulatory Authorities and to the extent required by law or regulation; provided, that prior to making any such legally required disclosure, the Recipient shall give the Discloser as much prior notice of the requirement for and contents of such disclosure as is practicable under the circumstances in order for the Recipient to allow the Discloser to seek a protective order or otherwise prevent or restrict disclosure of such Confidential Information. Any such disclosure, however, shall not relieve the Recipient of its obligations contained herein.

10.5No Implied License. Except as expressly set forth in Section 10.1, the Recipient will obtain no right of any kind or license under any Confidential Information of the Discloser, including any patent application or patent, by reason of this Agreement. All Confidential Information will remain the sole property of the Discloser, subject to Article 11.

10.6Return of Confidential Information. Upon expiration or termination of this Agreement, the Recipient will (and will cause its Affiliates and its and their respective Representatives to) cease its use and, upon written request, within [**] either return or destroy (and certify as to such destruction) all Confidential Information of the Discloser, including any copies thereof, except for a single copy which may be retained for the sole purpose of ensuring compliance with its obligations under this Agreement.

10.7Survival. The obligations of this Article will terminate [**] from the expiration or termination of this Agreement, except with respect to trade secrets, for which the obligations of this Article will continue for so long as such information remains a trade secret under applicable law.

ARTICLE 11

INTELLECTUAL PROPERTY

For purposes hereof, “Client IP” means all intellectual property and embodiments thereof owned by or licensed to Client as of the date hereof or developed by Client other than in connection with this Agreement; “Catalent IP” means all intellectual property and embodiments thereof owned by or licensed to Catalent as of the date hereof or developed by Catalent other than in connection with this Agreement; “Invention” means any invention or know-how (whether patentable or not, including intellectual property rights therein, developed by either party or jointly by the parties in connection with this Agreement; “Client Inventions” means any Invention that relates exclusively to the Client IP or the Client’s proprietary API or that is solely applicable to the Processing of the Product; and “Catalent Inventions” means any Invention, other than a Client Invention, that relates exclusively to the Catalent IP or relates to developing, formulating, manufacturing, filling, processing, packaging, analyzing or testing pharmaceutical products generally. All Client IP and Client Inventions shall be owned solely by Client and no right therein is granted to Catalent under this Agreement, except that Catalent shall have a non-exclusive, royalty-free license to such items solely to the extent necessary to perform its obligations under this Agreement. All Catalent IP and Catalent Inventions shall be owned solely by Catalent and no right therein is granted to Client under this Agreement, except that, to the extent that the Product incorporates or the Processing of the Product utilizes Catalent Inventions, Client shall have, and is hereby granted, a non-exclusive, worldwide, royalty-free license (including the right to grant sublicenses) to use such Catalent Inventions solely to the extent necessary for the use or sale of Product. Catalent hereby assigns to Client all Client Inventions and Client hereby assigns to Catalent all Catalent

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Inventions. Each party hereby agrees to execute such documents and otherwise cooperate with the other party to achieve the allocation of rights to Inventions anticipated herein and each party shall be solely responsible for costs associated with the protection of its intellectual property.

ARTICLE 12

REPRESENTATIONS AND WARRANTIES

12.1Catalent. Catalent represents, warrants and undertakes to Client that:

A. at the time of delivery by Catalent as provided in Section 6.1, Product shall meet all Specifications, shall have been Processed in accordance with Applicable Laws and the Quality Agreement and in conformance with the Specifications and shall not be adulterated, misbranded or mislabeled within the meaning of Applicable Laws; provided, that Catalent shall not be liable for defects attributable to Client-supplied Materials which are not the result of Catalent’s negligence or misconduct or otherwise under Catalent’s reasonable control (including artwork, advertising and labeling);

B.during the Term, the Facility, all equipment used for the Processing of Product (and the Validation Services or Product Maintenance Services) within such Facility, and the Processing, Validation Services, and Product Maintenance Services activities contemplated herein will conform to all Applicable Laws;

C.title to all Product supplied under this Agreement will pass as provided in this Agreement, free and clear of any security interest, lien, or other encumbrance;

D.neither Catalent nor any of its employees or subcontractors performing or involved with its performance under this Agreement have been “debarred” under 21 U.S.C. §335(a) or (b) or otherwise by any Regulatory Authority, nor to Catalent’s knowledge have debarment proceedings against Catalent or any of its employees or subcontractors been commenced. Catalent will promptly notify Client in writing if any such proceedings have commenced or if Catalent or any of its employees or subcontractors are debarred by any Regulatory Authority; and

E.all Validation Services and Product Maintenance Services shall be carried out in a diligent, professional manner in accordance with Catalent’s standard operating procedures and cGMP, if applicable.

12.2Client. Client represents, warrants and undertakes to Catalent that:

A.all Client-supplied Materials shall have been produced in accordance with Applicable Laws, shall comply with all applicable specifications, including the Specifications, shall not be adulterated, misbranded or mislabeled within the meaning of Applicable Laws, and shall have been provided in accordance with the terms and conditions of this Agreement;

B.the content of all artwork provided to Catalent shall comply with all Applicable Laws;

C.all Product delivered to Client by Catalent shall be held, used and disposed of by or on behalf of the Client in accordance with all Applicable Laws, and Client will otherwise comply with all laws, rules, regulations and guidelines applicable to Client’s performance under this Agreement;

D.Client will not release any Batch of Product if the required certificates of conformance indicate that Product does not comply with the Specifications or, with respect to any country in which such Batch of Product would be released, if Client does not hold all necessary Regulatory Approvals to market and sell the Product in such country;

E.Client has all necessary authority to use and to permit Catalent to use, pursuant to this Agreement, all Client IP related to the Product or the Client-supplied Materials (including artwork) for purposes of Processing the foregoing; and

F.to Client’s knowledge, there are no valid claims under third party patents, trade secrets or other proprietary rights related to the Client IP utilized with respect to the Product or the Processing of the Product that would be infringed or misused by Catalent Processing the Product in accordance with this Agreement.

12.3Mutual Representation. Furthermore, Catalent and Client both represent, warrant and undertake that no transactions or dealings under this Agreement shall be conducted with or for an individual or entity that is designated as the target of any sanctions, restrictions or embargoes administered by the United Nations, European Union, United Kingdom, or the United States.

12.4Limitations. THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE ARE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES MADE BY EACH PARTY TO THE OTHER PARTY, AND NEITHER PARTY MAKES ANY OTHER REPRESENTATIONS, WARRANTIES OR GUARANTEES OF ANY KIND WHATSOEVER,

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INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE.

ARTICLE 13

INDEMNIFICATION

13.1    Indemnification by Catalent. Catalent shall indemnify and hold harmless Client, its Affiliates, and their respective directors, officers and employees (“Client Indemnitees”) from and against any and all suits, claims, losses, demands, liabilities, damages, costs and expenses (including reasonable attorneys’ fees and reasonable investigative costs) in connection with any suit, demand or action by any third party (“Losses”) to the extent arising out of or resulting from (A) any breach of its representations, warranties or obligations set forth in this Agreement, (B) any actual or alleged infringement or violation of any third party patent, trade secret, copyright, trademark or other proprietary rights that directly results from Catalent’s use of Catalent IP, Catalent Confidential Information or any other manufacturing method or equipment supplied by Catalent in the performance of its activities under this Agreement or (C) any negligence or willful misconduct by Catalent; in each case except to the extent that any of the foregoing arises out of or results from any Client Indemnitee’s negligence, willful misconduct or breach of this Agreement.

13.2    Indemnification by Client. Client shall indemnify and hold harmless Catalent, its Affiliates, and their respective directors, officers and employees (“Catalent Indemnitees”) from and against any and all Losses to the extent arising out of or resulting from (A) any breach of its representations, warranties or obligations set forth in this Agreement, (B) [**], (C) Client’s exercise of control over the Processing, to the extent that Client’s instructions or directions violate Applicable Laws, (D) the conduct of any clinical trials utilizing Product or API under authority of Client or its designee, (E) any actual or alleged infringement or violation of any third party patent, trade secret, copyright, trademark or other proprietary rights that results from (i) Catalent’s use in accordance with this Agreement of Client IP or Client Confidential Information or Client-supplied Materials or (ii) Client’s sale of the Product, or (F) any negligence or willful misconduct by Client; in each case except to the extent that any of the foregoing arises out of or results from any Catalent Indemnitee’s negligence, willful misconduct or breach of this Agreement.

13.3    Indemnification Procedures. All indemnification obligations in this Agreement are conditioned upon the indemnified party (A) promptly notifying the indemnifying party of any claim or liability of which the indemnified party becomes aware (including a copy of any related complaint, summons, notice or other instrument); provided, that failure to provide such notice within a reasonable period of time shall not relieve the indemnifying party of any of its obligations hereunder except to the extent the indemnifying party is prejudiced by such failure, (B) allowing the indemnifying party, if the indemnifying party so requests, to conduct and control the defense of any such claim or liability and any related settlement negotiations (at the indemnifying party’s expense), (C) cooperating with the indemnifying party in the defense of any such claim or liability and any related settlement negotiations (at the indemnifying party’s expense) and (D) not compromising or settling any claim or liability without prior written consent of the indemnifying party, which shall not be unreasonably withheld or delayed. The indemnifying party shall have discretion to settle any action subject to indemnification under this Agreement; provided, that the indemnifying party shall not enter into any settlement that would adversely affect the indemnified party’s rights hereunder, or impose any obligations on the indemnified party, without the indemnified party’s written consent, which shall not be unreasonably withheld or delayed. The indemnified party shall have the right, but not the obligation, to be represented in such defense by counsel of its own selection and at its own expense.

ARTICLE 14

LIMITATIONS OF LIABILITY

14.1    CATALENT’S TOTAL LIABILITY UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS FOR LOST, DAMAGED OR DESTROYED CLIENT-SUPPLIED MATERIALS, WHETHER OR NOT SUCH CLIENT-SUPPLIED MATERIALS ARE INCORPORATED INTO PRODUCT shall not exceed [**], EXCEPT [**].

14.2    CATALENT’S TOTAL LIABILITY UNDER THIS AGREEMENT SHALL IN NO EVENT EXCEED [**], EXCEPT (A) [**], (B) [**] AND (C) [**].

14.3    NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OR LOSS OF REVENUES, PROFITS OR DATA ARISING OUT OF PERFORMANCE UNDER THIS AGREEMENT, WHETHER IN CONTRACT OR IN TORT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. FOR CLARITY, INDEMNIFIABLE LOSSES UNDER ARTICLE 13 SHALL NOT BE CHARACTERIZED AS INDIRECT, INCIDENTAL OR CONSEQUENTIAL SOLELY ON THE BASIS THAT SUCH LOSSES ARISE FROM DAMAGES SUFFERED BY A THIRD PARTY.

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ARTICLE 15

INSURANCE

Each party shall, at its own cost and expense, obtain and maintain in full force and effect during the Term the following: (A) [**]; (B) [**]; (C) [**]; and (D) [**]. Such insurance shall be adequate to cover each party’s obligations and liabilities hereunder and shall be consistent with normal business practices of comparable companies with respect to similar obligations and liabilities. Each party may self-insure all or any portion of the required insurance as long as, together with its Affiliates, its US GAAP net worth is greater than $100 million or its annual EBITDA (earnings before interest, taxes, depreciation and amortization) is greater than $75 million. Each required insurance policy, other than self-insurance, shall be obtained from an insurance carrier with an A.M. Best rating of at least A-VII or Moodys, S&P or Fitch equivalent. If any of the required policies of insurance are written on a claims made basis, such policies shall be maintained throughout the Term and for a period of at least [**] thereafter. Each party shall obtain a waiver of subrogation clause from its property insurance carriers in favor of the other party. Each party shall be named as an additional insured within the other party’s products liability insurance policies; provided, that such additional insured status will apply solely to the extent of the insured party’s indemnity obligations under this Agreement. Such waivers of subrogation and additional insured status obligations will operate the same whether insurance is carried through third parties or self-insured. Upon the other party’s written request from time to time, each party shall promptly furnish to the other party a certificate of insurance or other evidence of the required insurance.

ARTICLE 16

TERM AND TERMINATION

16.1Term. This Agreement shall commence on the Effective Date and shall continue until the end of the fifth Contract Year, unless earlier terminated in accordance with Section 16.2 (as may be extended in accordance with this Section 16.1, the “Term”). The Term shall automatically be extended for successive [**] periods unless and until one party gives the other party at least [**] prior written notice of its desire to terminate as of the end of the then-current Term.

16.2Termination. This Agreement may be terminated immediately without further action:

A.by either party if the other party files a petition in bankruptcy, or enters into an agreement with its creditors, or applies for or consents to the appointment of a receiver, administrative receiver, trustee or administrator, or makes an assignment for the benefit of creditors, or suffers or permits the entry of any order adjudicating it to be bankrupt or insolvent and such order is not discharged within [**], or takes any equivalent or similar action in consequence of debt in any jurisdiction;

B.by either party if the other party materially breaches any of the provisions of this Agreement and such breach is not cured within [**] after the giving of written notice requiring the breach to be remedied; provided, that in the case of a failure of Client to make payments in accordance with valid invoices submitted in accordance with the terms of this Agreement, Catalent may terminate this Agreement if such payment breach is not cured within [**] of receipt of notice of non-payment from Catalent; or

C.immediately upon written notice by Client or Catalent in the circumstances described in Section 7.3.

16.3Effect of Expiration or Termination. Expiration or termination of this Agreement shall be without prejudice to any rights or obligations that accrued to the benefit of either party prior to such expiration or termination. In the event of expiration or termination of this Agreement:

A.Catalent shall promptly return to Client, at Client’s expense and direction, any remaining inventory of Product or Client-supplied Materials; provided, that all outstanding valid invoices have been paid in full;

B.Client shall pay Catalent all invoiced amounts validly submitted and outstanding hereunder, plus, upon receipt of invoice therefor, for any (i) Product that has been shipped pursuant to Purchase Orders but not yet invoiced, (ii) Product Processed pursuant to Purchase Orders that has been completed but not yet shipped , and (iii) in the event that this Agreement is terminated for any reason other than by Client pursuant to Section 16.2(A) or (B), or by either party pursuant to Section 16.2(c), all Product in process of being Processed pursuant to Purchase Orders (or, alternatively, Client may instruct Catalent to complete such work in process, and the resulting completed Product shall be governed by clause (ii));

C.in the event that this Agreement is terminated for any reason other than by Client pursuant to Section 16.2(A) or (B), or by either party pursuant to Section 16.2(C), Client shall pay Catalent for all costs and expenses incurred, and all noncancellable commitments made, in connection with Catalent’s performance of this Agreement to the extent not otherwise paid hereunder, so long as such costs, expenses or commitments were made by Catalent consistent with Client’s most recent Firm Commitment and the vendor’s minimum purchase obligations; and

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D.in the event that this Agreement expires or is terminated for any reason, Catalent shall use its commercially reasonable efforts to assist Client, as reasonably requested, to transition the manufacture and supply of the Product to Client, its Affiliate, or its designated Third Party manufacturer in a timely and orderly manner, which efforts shall include, without limitation, Catalent providing Client with access to the relevant Catalent Inventions licensed to Client pursuant to Article 11. For clarity, Catalent shall only be required to provide such assistance which is necessary for Client to ensure the continued manufacture and supply of the Product and which is not otherwise accessible by Client; provided, however, that in the event that, after good faith discussions, the parties are unable to reach agreement with respect to whether the foregoing assistance requested by Client is “necessary” or “not otherwise accessible”, then the parties shall refer the matter to alternative dispute resolution pursuant to the terms of Section 18.10 of this Agreement, and notwithstanding the time periods set forth in such Section 18.10, the parties shall make all reasonable efforts to expedite such dispute resolution process to the extent possible in order to resolve this issue. If such termination is by Client pursuant to Section 16.2(A) or (B), the costs of such transition shall be borne by Catalent. In all other events of expiration or termination, the costs of such transition shall be borne by Client, at Catalent’s then prevailing rates for such services.

16.4Survival. The rights and obligations of the parties shall continue under Articles 11 (Intellectual Property), 13 (Indemnification), 14 (Limitations of Liability), 17 (Notice), 18 (Miscellaneous); under Articles 10 (Confidentiality and Non-Use) and 15 (Insurance), in each case to the extent expressly stated therein; and under Sections 7.4 (Payment Terms), 7.5 (Taxes), 7.6 (Client and Third Party Expenses), 9.1 (Recordkeeping), 9.2 (Regulatory Compliance), 9.3 (Governmental Inspections and Requests), 9.4 (Client Facility Audits), 9.5 (Recall), 12.1 (Catalent Representations and Warranties), 12.2 (Client Representations and Warranties), 12.4 (Limitations), 16.3 (Effect of Expiration or Termination) and 16.4 (Survival), in each case in accordance with their respective terms if applicable, notwithstanding expiration or termination of this Agreement.

ARTICLE 17

NOTICE

All notices and other communications hereunder shall be in writing and shall be deemed given: (A) when delivered personally or by hand; (B) when delivered by electronic mail (e-mail); (C) when delivered by facsimile transmission (receipt verified); (D) when received or refused, if sent by registered or certified mail (return receipt requested), postage prepaid; or (E) when delivered, if sent by express courier service; in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof):

To Client: Lexicon Pharmaceuticals, Inc.

8800 Technology Forest Place

The Woodlands, TX 77381

Attn: General Counsel

Facsimile: 281-863-8010

To Catalent:                Catalent CTS, LLC

10245 Hickman Mills Drive

Kansas City, MO 64137

Attn: General Manager

Facsimile: 816-767-7312

With a copy to: Catalent Pharma Solutions, LLC

14 Schoolhouse Road

Somerset, NJ 08873

USA

Attn: General Counsel (Legal Department)

E-Mail: GenCouns@catalent.com

ARTICLE 18

MISCELLANEOUS

18.1Entire Agreement; Amendments. This Agreement, together with the Quality Agreement, constitutes the entire understanding between the parties, and supersedes any contracts, agreements or understandings (oral or written) of the parties, with respect to the subject matter hereof. For the avoidance of doubt, this Agreement does not supersede any existing generally applicable confidentiality agreement between the parties as it relates to time periods prior to the date hereof or to business dealings not covered by this Agreement. No term of this Agreement may be amended except upon written agreement of both parties, unless otherwise expressly provided in this Agreement.

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18.2Captions; Certain Conventions. The captions in this Agreement are for convenience only and are not to be interpreted or construed as a substantive part of this Agreement. Unless otherwise expressly provided herein or the context of this Agreement otherwise requires, (A) words of any gender include each other gender, (B) words such as “herein”, “hereof”, and “hereunder” refer to this Agreement as a whole and not merely to the particular provision in which such words appear, (C) words using the singular shall include the plural, and vice versa, (D) the words “include(s)” and “including” shall be deemed to be followed by the phrase “but not limited to”, “without limitation” or words of similar import, (E) the word “or” shall be deemed to include the word “and” (e.g., “and/or”) and (F) references to “Article,” “Section,” “subsection,” “clause” or other subdivision, or to an Attachment or other appendix, without reference to a document are to the specified provision or Attachment of this Agreement. This Agreement shall be construed as if it were drafted jointly by the parties.

18.3Further Assurances. The parties agree to execute, acknowledge and deliver such further instruments and to take all such other incidental acts as may be reasonably necessary or appropriate to carry out the purpose and intent of this Agreement.

18.4No Waiver. Failure by either party to insist upon strict compliance with any term of this Agreement in any one or more instances will not be deemed to be a waiver of its rights to insist upon such strict compliance with respect to any subsequent failure.

18.5Severability. If any term of this Agreement is declared invalid or unenforceable by a court or other body of competent jurisdiction, the remaining terms of this Agreement will continue in full force and effect.

18.6Independent Contractors. The relationship of the parties is that of independent contractors, and neither party will incur any debts or make any commitments for the other party except to the extent expressly provided in this Agreement. Nothing in this Agreement is intended to create or will be construed as creating between the parties the relationship of joint ventures, co-partners, employer/employee or principal and agent. Neither party shall have any responsibility for the hiring, termination or compensation of the other party’s employees or contractors or for any employee benefits of any such employee or contractor.

18.7Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties, their successors and permitted assigns. Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other party, except that (a) either party may, without the other party’s consent (but subject to prior written notice), assign this Agreement in its entirety to an Affiliate or to a successor to substantially all of the business or assets of the assigning party or the assigning party’s business unit responsible for performance under this Agreement and (b) following an Adverse Supply Event, Client may, without Catalent’s consent (but subject to prior written notice), assign this Agreement to a Client Licensee with respect to the Processing of Products for sale in the regions in the Territory for which such Client Licensee has obtained a license for the commercialization of the Product.

18.8No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person or entity other than the parties named herein and their respective successors and permitted assigns.

18.9Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware, USA, excluding its conflicts of law provisions. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.

18.10Alternative Dispute Resolution. Any dispute arises between the parties in connection with this Agreement shall first be presented to the respective chief executive officers or senior executives (or equivalent positions) of the parties for their consideration and resolution. If such parties’ officers cannot resolve such dispute within [**], then such dispute shall be submitted to arbitration by the International Institute for Conflict Prevention and Resolution, 575 Lexington Avenue, 21st Floor, New York, NY  10022 (“CPR”) by a panel of three arbitrators having reasonable experience in commercial transactions of the type provided for in this Agreement. Each party will nominate one arbitrator, and these arbitrators shall mutually agree upon a third arbitrator. If no agreement can be reached with respect to the third arbitrator within [**] after names of potential arbitrators have been proposed by the CPR, then the CPR will choose a third arbitrator having reasonable experience in commercial transactions of the type provided for in this Agreement. The arbitration shall take place in the English language in New York City, New York, in accordance with the CPR administered arbitration rules then in effect, and judgment upon any award rendered in such arbitration will be binding and may be entered in any court having jurisdiction thereof. The arbitration shall commence within [**] of the date on which a written demand for arbitration is filed. The arbitrator’s decision shall set forth a reasoned basis for any award of damages or finding of liability. The arbitrator shall not have power to award damages in excess of actual compensatory damages and shall not multiply actual damages or award punitive damages. The arbitrator shall award to the prevailing party, if any, the costs and attorneys’ fees reasonably incurred by the prevailing party in connection with the arbitration.

18.11Prevailing Party. In any dispute resolution proceeding between the parties in connection with this Agreement, the prevailing party will be entitled to recover its reasonable attorney’s fees and costs in such proceeding from the other party.

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18.12Publicity. Neither party will make any press release or other public disclosure regarding this Agreement or the transactions contemplated hereby without the other party’s express prior written consent, except as required under Applicable Laws (including the rules and regulations of the United States Securities and Exchange Commission), by any governmental agency or by the rules of any stock exchange on which the securities of the disclosing party are listed, in which case the party required to make the press release or public disclosure shall use commercially reasonable efforts to obtain the approval of the other party as to the form, nature and extent of the press release or public disclosure prior to issuing the press release or making the public disclosure.

18.13Right to Dispose. If Catalent requests in writing from Client direction with respect to disposal of any inventories of Product, Client-supplied Materials, equipment, samples or other items belonging to Client and is unable to obtain a response from Client within a reasonable time period after making reasonable efforts to do so, Catalent shall be entitled in its sole discretion to dispose of all such items.

18.14Force Majeure. Except as to payments required under this Agreement, neither party shall be liable in damages for, nor shall this Agreement be terminable or cancelable by reason of, any delay or default in such party’s performance hereunder if such default or delay is caused by events beyond such party’s reasonable control, including acts of God, law or regulation or other action or failure to act of any government or agency thereof, war or insurrection, civil commotion, destruction of production facilities or materials by earthquake, fire, flood or weather, labor disturbances, epidemic, or failure of (i) a party’s supplier or vendors due to a force majeure event materially and adversely affecting the performance of such suppliers or vendors, (ii) public utilities or (iii) common carriers; provided, that the party seeking relief under this Section 18.14 shall immediately notify the other party of such cause(s) beyond such party’s reasonable control. The party that may invoke this Section 18.14 shall use commercially reasonable efforts to reinstate its ongoing obligations to the other party as soon as practicable. If the cause(s) shall continue unabated for [**], then both parties shall meet to discuss and negotiate in good faith what modifications to this Agreement should result from such cause(s). Notwithstanding the foregoing, in the event that Catalent is the party experiencing any such force majeure event for [**], Client shall not be obligated to exclusively purchase Product from Catalent as set forth in Section 2.2 and shall not be bound by the Minimum Requirement as set forth in Section 4.1 until the cessation of such force majeure event.

18.15Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument. Any photocopy, facsimile or electronic reproduction of the executed Agreement shall constitute an original.

[Signature page follows]

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IN WITNESS WHEREOF, the parties have caused their respective duly authorized representatives to execute this Agreement effective as of the Effective Date.

CATALENT CTS, LLC

By:

Name:

Title:

LEXICON PHARMACEUTICALS, INC.

By:

Name:

Title:

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ATTACHMENT A

VALIDATION SERVICES

Catalent will perform the Product qualification, validation and stability services as described in and in accordance with Process Performance Qualification Protocol No. KP2016-144, as separately agreed by the parties. Such services will be provided for an aggregate of [**] validation batches of Product in accordance with the terms and conditions of that certain Statement of Work No. 38 pursuant to the Master Services Agreement dated as of July 6, 2007, as amended.

In consideration for the foregoing services, Client agrees to make the payments to Catalent as described in such Statement of Work.

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ATTACHMENT B

SPECIFICATIONS

I. Client-Supplied Materials (and associated specifications)

[** Four (4) pages redacted]

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II.Raw Materials (and associated specifications)

Material	Material ID No.	Spec No.
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]

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III.Product Specifications (including Batch size)

[** Five (5) pages redacted]

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ATTACHMENT C

UNIT PRICING, FEES, MINIMUM REQUIREMENT AND MINIMUM CAPACITY

Minimum Requirement & Unit Pricing
Product	Dosage Form / Unit Strenght	Contract Year	Annual Minimum Unit Requirement	Unit price	Minimum shortfall Unit pricing
Telotristat Etiprate (LX-1606) Tablets	Tablets / 250mg	1	[**]	$[**]	$[**]
		2	[**]
		3	[**]
		4	[**]
		5	[**]
		Each additional Contract Year	[**]

* One unit (“Unit”) is one. Unit Pricing also does not include [**]. Prices also do not include any [**] other than as expressly set forth in the Specifications. Prices are based on the assumptions as to manufacturing processes, storage conditions, etc. as reflected in the Specifications. Accordingly, prices are subject to adjustment upon mutual agreement of the parties in the event any such assumptions are revised by Client or modified in connection with the Validation Services performed on the Product.

The parties anticipate that one Batch will represent approximately [**] tablets.

For Contract Year 1, the Minimum Requirement referenced above includes Product produced hereunder pursuant to the Validation Services and any other batches of Product intended for commercialization produced by Catalent prior to the Commencement Date. For Contract Year 1, any amount purchased over the Minimum Requirement for such Contract Year will be allocated to the Minimum Requirement for Contract Year 2. For Contract Year 2, any amount purchased or otherwise allocated over the Minimum Requirement for such Contract Year will be allocated to the Minimum Requirement for Contract Year 3. For Contract Year 4 and each subsequent Contract Year, if the Minimum Requirement is not met, Client will pay for the difference between the number of Units actually purchased during the applicable Contract Year and the Minimum Requirement for the applicable Contract Year at the minimum shortfall unit pricing set forth in the table above. Notwithstanding the foregoing and for the avoidance of doubt, in the event that Client does not meet the Minimum Requirement for any specific Contract Year (including Contract Years 1, 2 and 3), then Client will pay for the difference between the number of Units actually purchased during or allocated to the applicable Contract Year and the Minimum Requirement for the applicable Contract Year at the minimum shortfall unit pricing set forth in the table above.

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ATTACHMENT D

PRODUCT MAINTENANCE SERVICES, & ADDITIONAL FEES

Product Maintenance Services:

Product Maintenance Services are comprised of the following:

1. [**];

2. [**];

3. [**];

4. [**];

5. [**];

6. [**];

7. [**];

8. [**];

9. [**];

10. [**].

11. [**]

Client shall have observation rights pursuant to Section 4.7 with respect to Items 7, 9, 10 and 11 above.

The following services and items are not included in Product Maintenance Services:

1. [**];

2. [**];

3. [**];

4. [**].

The services and fees for items 1-4 above, if requested by Client, shall be made in accordance with Section 2.4 of the Agreement.

COMMERCIAL BATCH STABILITY SCHEDULE
Storage Condition	Interval (Months)
	T0	3	6	9	12	18	24	36	48	60
[**]	XY*	X	X	X	X	XY	X	XY	XY	XY
Total	$[**]	$[**]	$[**]	$[**]	$[**]	$[**]	$[**]	$[**]	$[**]	$[**]

X = [**]

Y = [**]

* = [**]

Assumes 1 package configuration.

FEES
Type of Fee	Amount	Payable
Product Maintenance Services (other than commercial stability testing)	$[**]	Annually
Commercial stability testing	$[**]	Per schedule provided above
[**]	$[**]	[**]
Delayed Approval Fee	$[**]	Per Month
Telotristat Etiprate API Release Testing	$[**]	[**]
Storage Fees	$[**]	Per Month

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Lonnel Coats, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Lexicon Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 4, 2017

/s/ Lonnel Coats

Lonnel Coats

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Jeffrey L. Wade, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Lexicon Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 4, 2017

/s/ Jeffrey L. Wade

Jeffrey L. Wade

Executive Vice President, Corporate and Administrative Affairs and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350, as adopted), Lonnel Coats, Principal Executive Officer of Lexicon Pharmaceuticals, Inc. (“Lexicon”), and Jeffrey L. Wade, Principal Financial Officer of Lexicon, each hereby certify that:

1. Lexicon's Quarterly Report on Form 10-Q for the period ended March 31, 2017, and to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Lexicon.

IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 4th day of May, 2017.

By:	/s/ Lonnel Coats
	Lonnel Coats
	President and Chief Executive Officer

By:	/s/ Jeffrey L. Wade
	Jeffrey L. Wade
	Executive Vice President, Corporate and Administrative Affairs and Chief Financial Officer

XML

Document and Entity Information Document - shares	3 Months Ended
	Mar. 31, 2017	May 01, 2017
Document Information [Line Items]
Entity Registrant Name	LEXICON PHARMACEUTICALS, INC./DE
Entity Central Index Key	0001062822
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Amendment Flag	false
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		105,235,366

XML

Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 2,455	$ 46,600
Short-term investments	257,288	299,904
Accounts receivable, net of allowances of $4	8,733	7,492
Inventory	236	0
Prepaid expenses and other current assets	10,376	3,878
Total current assets	279,088	357,874
Property and equipment, net of accumulated depreciation and amortization of $60,362 and $59,875, respectively	18,995	19,390
Goodwill	44,543	44,543
Other intangible assets, net of accumulated amortization of $147 and $0, respectively	53,210	53,357
Other assets	428	461
Total assets	396,264	475,625
Current liabilities:
Accounts payable	41,945	52,877
Accrued liabilities	10,191	32,114
Current portion of deferred revenue	69,172	63,372
Current portion of long-term debt, net of deferred issuance costs	15,753	16,280
Total current liabilities	137,061	164,643
Deferred revenue, net of current portion	28,750	48,934
Long-term debt, net of deferred issuance costs	85,268	85,167
Deferred tax liabilities	10,023	18,675
Other long-term liabilities	559	805
Total liabilities	261,661	318,224
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $.001 par value; 225,000 shares authorized; 105,338 and 104,582 shares issued, respectively	105	105
Additional paid-in capital	1,423,911	1,411,222
Accumulated deficit	(1,287,245)	(1,250,363)
Accumulated other comprehensive loss	(264)	(195)
Treasury stock, at cost, 122 and 306 shares, respectively	(1,904)	(3,368)
Total equity	134,603	157,401
Total liabilities and equity	$ 396,264	$ 475,625

XML

Balance Sheet Parenthetical (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Allowances for accounts receivable	$ 4	$ 4
Accumulated depreciation and amortization, property and equipment	60,362	59,875
Accumulated intangible assets amortization	$ 147	$ 0
Preferred stock, par value per share	$ 0.01	$ 0.01
Preferred stock, shares authorized	5,000	5,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value per share	$ 0.001	$ 0.001
Common stock, shares authorized	225,000	225,000
Treasury stock, shares	122	306
Common Stock
Common stock, shares issued	105,338	104,582

XML

Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Revenues:
Net product revenue	$ 721	$ 0
Collaborative agreements	17,565	12,494
Subscription and license fees	7	0
Total revenues	18,293	12,494
Operating expenses:
Cost of sales (including finite-lived intangible asset amortization)	225	0
Research and development, including stock-based compensation of $1,184 and $989, respectively	43,581	37,002
Increase in fair value of Symphony Icon, Inc. purchase liability	2,101	965
Selling, general and administrative, including stock-based compensation of $1,047 and $846, respectively	14,871	8,398
Total operating expenses	60,778	46,365
Loss from operations	(42,485)	(33,871)
Interest expense	(1,588)	(1,649)
Interest and other income, net	530	637
Consolidated net loss before taxes	(43,543)	(34,883)
Deferred tax benefit	(8,652)	0
Net loss	$ (34,891)	$ (34,883)
Net loss per common share, basic and diluted	$ (0.33)	$ (0.34)
Shares used in computing consolidated net loss per common share, basic and diluted	104,461	103,682
Unrealized gain (loss) on investments	$ (69)	$ 516
Comprehensive loss	$ (34,960)	$ (34,367)

XML

Statements of Comprehensive Loss Parenthetical (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Stock-based compensation expense associated with research and development expense	$ 1,184	$ 989
Stock-based compensation expense associated with general and administrative expense	$ 1,047	$ 846

XML

Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Accumulated Other Comprehensive Gain (Loss)	Treasury Stock
Balance, shares at Dec. 31, 2015		103,860
Balance, value at Dec. 31, 2015	$ 285,850	$ 104	$ 1,397,646	$ (1,108,934)	$ (219)	$ (2,747)
Issuance of common stock to designees of Symphony Icon Holdings LLC, value	0
Stock-based compensation	1,835	$ 0	1,835	0	0	0
Issuance of common stock under Equity Incentive Plans, shares		223
Issuance of common stock under Equity Incentive Plans, value	184	$ 0	184	0	0	0
Repurchase of common stock	(621)	0	0	0	0	(621)
Net loss	(34,883)	0	0	(34,883)	0	0
Unrealized gain (loss) on investments	516	$ 0	0	0	516	0
Balance, shares at Mar. 31, 2016		104,083
Balance, value at Mar. 31, 2016	252,881	$ 104	1,399,665	(1,143,817)	297	(3,368)
Balance, shares at Dec. 31, 2016		104,582
Balance, value at Dec. 31, 2016	157,401	$ 105	1,411,222	(1,250,363)	(195)	(3,368)
Cumulative effect of change in accounting principle	0	$ 0	1,991	(1,991)	0	0
Issuance of common stock to designees of Symphony Icon Holdings LLC, shares		660
Issuance of common stock to designees of Symphony Icon Holdings LLC, value	10,499	$ 0	10,499	0	0	0
Stock-based compensation	2,231	$ 0	2,231	0	0	0
Issuance of common stock under Equity Incentive Plans, shares		96
Issuance of common stock under Equity Incentive Plans, value	1,111	$ 0	1,111	0	0	0
Issuance of treasury stock	0	0	(3,143)	0	0	3,143
Repurchase of common stock	(1,679)	0	0	0	0	(1,679)
Net loss	(34,891)	0	0	(34,891)	0	0
Unrealized gain (loss) on investments	(69)	$ 0	0	0	(69)	0
Balance, shares at Mar. 31, 2017		105,338
Balance, value at Mar. 31, 2017	$ 134,603	$ 105	$ 1,423,911	$ (1,287,245)	$ (264)	$ (1,904)

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities:
Net loss	$ (34,891)	$ (34,883)
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
Depreciation and amortization	634	521
Increase in fair value of Symphony Icon, Inc. purchase liability	2,101	965
Stock-based compensation	2,231	1,835
Amortization of debt issuance costs	110	125
Deferred tax benefit	(8,652)	0
Loss on disposal of property and equipment	0	12
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(1,241)	170
Increase in inventory	(236)	0
Increase in prepaid expenses and other current assets	(6,498)	(4,134)
Decrease in other assets	33	0
Increase (decrease) in accounts payable and other liabilities	(24,703)	3,836
Decrease in deferred revenue	(14,384)	(12,187)
Net cash used in operating activities	(85,496)	(43,740)
Cash flows from investing activities:
Purchases of property and equipment	(92)	(54)
Purchases of investments	(60,905)	(208,986)
Maturities of investments	103,452	75,400
Net cash provided by (used in) investing activities	42,455	(133,640)
Cash flows from financing activities:
Proceeds from issuance of common stock	1,111	184
Repurchase of common stock	(1,679)	(621)
Repayment of debt borrowings	(536)	(491)
Net cash used in financing activities	(1,104)	(928)
Net decrease in cash and cash equivalents	(44,145)	(178,308)
Cash and cash equivalents at beginning of period	46,600	202,989
Cash and cash equivalents at end of period	2,455	24,681
Supplemental disclosure of cash flow information:
Cash paid for interest	332	378
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in satisfaction of Symphony Icon payment obligation	10,499	0
Unrealized gain (loss) on investments	$ (69)	$ 516

XML

Summary of Significant Accounting Policies (Notes)

3 Months Ended

Mar. 31, 2017

Summary of Significant Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

The accompanying consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

For further information, refer to the financial statements and footnotes thereto included in Lexicon’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. 

Use of Estimates: The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.  As of March 31, 2017 and December 31, 2016, short-term investments consist of U.S. treasury bills and corporate debt securities. The Company’s short-term investments are classified as available-for-sale securities and are carried at fair value, based on quoted market prices of the securities.  The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security.  Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity.  Net realized gains and losses, interest and dividends are included in interest income.  The cost of securities sold is based on the specific identification method.

Accounts Receivable:  Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services.   The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the economic climate and other factors that could affect collectibility.  Write-offs are evaluated on a case by case basis.

Inventory: Inventories are determined at the lower of cost or market value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods. The Company began capitalizing inventory during the three months ended March 31, 2017 once the U.S. Food and Drug Administration (“FDA”) approved XERMELO (telotristat ethyl) as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO were recorded as research and development expense in the consolidated statements of operations. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Inventory consisted of the following as of March 31, 2017 (in thousands):

Raw materials	$	200
Work-in-process	1
Finished goods	35
Total inventory	$	236

Concentration of Credit Risk: Lexicon’s cash equivalents, investments and accounts receivable represent potential concentrations of credit risk. The Company attempts to minimize potential concentrations of risk in cash equivalents and investments by placing investments in high-quality financial instruments. The Company’s accounts receivable are unsecured and are concentrated in pharmaceutical and biotechnology companies located in Europe and the United States.  The Company has not experienced any significant credit losses to date.  

Segment Information and Significant Customers: Lexicon operates in one business segment, which primarily focuses on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease. Substantially all of the Company’s revenues have been derived from drug discovery alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology licenses, subscriptions to its databases, government grants and contracts, compound library sales and product sales.

Property and Equipment: Property and equipment that is held and used is carried at cost and depreciated using the straight-line method over the estimated useful life of the assets which ranges from three to 40 years.  Maintenance, repairs and minor replacements are charged to expense as incurred.  Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term.  Significant renewals and betterments are capitalized.

Other Intangible Assets: Other intangible assets, net consist of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives. During the three months ended March 31, 2017, intangible assets relating to XERMELO of $24.7 million were reclassified from indefinite-lived to finite-lived assets once the FDA approved XERMELO. The Company recorded $0.1 million in amortization expense related to this asset, which is recorded as cost of sales in the accompanying consolidated statement of operations for the three months ended March 31, 2017.

During the three months ended March 31, 2017, the Company’s valuation allowance for its deferred tax assets decreased by $8.7 million due to the reclassification of intangible assets relating to XERMELO from indefinite-lived to finite-lived assets, which resulted in the related deferred tax liability now being considered a source of taxable income. The Company recorded a $8.7 million deferred tax benefit with a corresponding reduction in its deferred tax liability in the three months ended March 31, 2017 as a result of this reclassification.

Impairment of Long-Lived Assets:  Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There was no impairment of long-lived assets in the three months ended March 31, 2017 and 2016.

Indefinite lived intangible assets are also tested annually for impairment and whenever indicators of impairment are present. When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its intangible assets. If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates the asset’s fair value. If the carrying value of the asset exceeds its fair value, then the intangible asset is written down to its fair value.

Goodwill Impairment:  Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level.  The Company has determined that the reporting unit is the single operating segment disclosed in its current financial statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill.  If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized.  Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.  There was no impairment of goodwill in the three months ended March 31, 2017 and 2016.

Revenue Recognition: Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.  

Product Revenues

Product revenues consist of U.S. sales of XERMELO. Product revenues are recognized once the Company meets all four revenue recognition criteria described above. In March 2017, Lexicon began shipping XERMELO to its customers in the U.S. The Company recognizes revenue for product sales of XERMELO at the time the product is received by its specialty pharmacy customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. Product shipping and handling costs are included in cost of sales.

Customer Credits: The specialty pharmacies are offered various forms of consideration, including allowances, service fees and prompt payment discounts. Lexicon expects the specialty pharmacies will earn prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates are based in part on third party market research data, and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy, in turn, charges back to Lexicon the difference between the price initially paid by the specialty pharmacy and the discounted price paid to the specialty pharmacy by the customer. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Collaborative Agreements

Revenues under collaborative agreements include both license revenue and contract research revenue. Activities under collaborative agreements are evaluated to determine if they represent a multiple element revenue agreement. The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. The Company accounts for those components as separate units of accounting if the following two criteria are met:

• The delivered item or items have value to the customer on a stand-alone basis; and

• If there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company’s control.

Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative estimated selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.

Future milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. A milestone is substantive if:

• The consideration payable to the Company is commensurate with the Company’s performance necessary to achieve the milestone or the increase in value to the collaboration resulting from the Company’s performance;

• Relates solely to the Company’s past performance; and

• Is reasonable relative to all of the other deliverables and payments within the arrangement.

Commercial milestones will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Subscription and license fees are recognized as revenue upon the grant of the technology license when performance is complete and there is no continuing involvement. Royalty revenues are recognized as earned in accordance with the contract terms at the time the royalty amount is fixed and determinable based on information received from the sublicensees and at the time collectibility is reasonably assured.

Cost of Sales: Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The Company began capitalizing inventory during the three months ended March 31, 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO have been recorded as research and development expense in the statements of operations. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Product shipping and handling costs are included in cost of sales. Cost of sales also includes the amortization of the in-process research and development intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Research and Development Expenses: Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred.  Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.

Stock-Based Compensation:  The Company recognizes compensation expense in its statements of comprehensive loss for share-based payments, including stock options and restricted stock units issued to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award.  Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met.  

The fair value of stock options is estimated at the date of grant using the Black-Scholes method.  The Black-Scholes option-pricing model requires the input of subjective assumptions.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.  For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in a change in the assumptions used for expected option lives and forfeitures.  Expected volatility is based on the historical volatility in the Company’s stock price.  The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted, with the following weighted-average assumptions for options granted in the three months ended March 31, 2017 and 2016:

	Expected Volatility		Risk-free Interest Rate		Expected Term	Dividend Rate
March 31, 2017:
Employees	62	%	1.7	%	4	—	%
Officers and non-employee directors	71	%	2.3	%	8	—	%
March 31, 2016:
Employees	63	%	1.1	%	4	—	%
Officers and non-employee directors	83	%	1.6	%	8	—	%

The following is a summary of option activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2017:

	Options		Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2016	4,834		$	11.24
Granted	709		14.43
Exercised	(96	)	11.53
Expired	(120	)	27.58
Forfeited	(3	)	15.80
Outstanding at March 31, 2017	5,324		11.29
Exercisable at March 31, 2017	2,875		$	11.48

During the three months ended March 31, 2017, Lexicon also granted its employees annual restricted stock units. These restricted stock units vest in four annual installments. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2017:

	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2016	875		$	8.13
Granted	418		14.44
Vested	(286	)	8.78
Forfeited	(4	)	10.37
Outstanding at March 31, 2017	1,003		$	10.56

Net Loss per Common Share: Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units are not included because they are antidilutive.

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Recent Accounting Pronouncements Level 1 (Notes)

3 Months Ended

Mar. 31, 2017

Recent Accounting Pronouncements [Abstract]

New Accounting Pronouncements, Policy

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which amends FASB ASC Topic 606. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles for the determination of the measurement of revenue and the timing of when such revenue is recognized. Revenue recognition will reflect the transfer of goods or services to customers at an amount that is expected to be earned in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of Effective Date”, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual periods after December 15, 2017 including interim periods within that reporting period. Early application is permitted only for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Management is currently evaluating the impact of these pronouncements on Lexicon’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Management does not expect the adoption of this pronouncement to have a material impact on Lexicon’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 requires companies that lease assets to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The pronouncement will also require additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this pronouncement on Lexicon’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation,” which is intended to simplify several aspects of the accounting for share-based payment award transactions. The Company adopted this pronouncement effective January 1, 2017. Upon adoption, the Company recognized approximately $6.1 million of accumulated excess tax benefits as deferred tax assets that under the previous guidance could not be recognized until the benefits were realized through a reduction in cash taxes paid. This part of the guidance is applied using a modified retrospective method with a cumulative-effect adjustment to the accumulated deficit for the excess tax benefits not previously recognized. However, given the full valuation allowance placed on the additional $6.1 million of deferred tax assets, the recognition of this provision of ASU 2016-09 had no impact to the Company’s accumulated deficit as of January 1, 2017. Additionally, the Company recorded an adjustment to accumulated deficit of $2.0 million as a result of making an entity-wide accounting policy election to account for forfeitures of share-based payment awards as they occur instead of estimating the number of awards that are expected to vest.

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Cash and Cash Equivalents and Investments

3 Months Ended

Mar. 31, 2017

Cash and Cash Equivalents and Investments [Abstract]

Cash and Cash Equivalents Disclosure

Cash and Cash Equivalents and Investments

The fair value of cash and cash equivalents and investments held at March 31, 2017 and December 31, 2016 are as follows:

	As of March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	2,455	$	—	$	—		$	2,455
Securities maturing within one year:
U.S. treasury securities	191,443		—		(195		)	191,248
Corporate debt securities	66,109		—		(69		)	66,040
Total short-term investments	$	257,552	$	—	$	(264	)	$	257,288
Total cash and cash equivalents and investments	$	260,007	$	—	$	(264	)	$	259,743
	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
Cash and cash equivalents	$	46,600	$	—	$	—		$	46,600
Securities maturing within one year:
U.S. treasury securities	227,911		1		(107		)	227,805
Corporate debt securities	72,188		1		(90		)	72,099
Total short-term investments	$	300,099	$	2	$	(197	)	$	299,904
Total cash and cash equivalents and investments	$	346,699	$	2	$	(197	)	$	346,504

There were $7,000 in realized losses for the three months ended March 31, 2017, and no realized gains or losses for the three months ended March 31, 2016. The cost of securities sold is based on the specific identification method.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2017

Fair Value Measurements [Abstract]

Fair Value, Measurement Inputs, Disclosure

Fair Value Measurements

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities:

• Level 1 - quoted prices in active markets for identical investments, which include U.S. treasury securities

• Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.), which includes corporate debt securities

• Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of the Symphony Icon purchase consideration liability)

The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities. The following table provides the fair value measurements of applicable Company assets and liabilities that are measured at fair value on a recurring basis according to the fair value levels described above as of March 31, 2017 and December 31, 2016:

	Assets and Liabilities at Fair Value as of March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	2,455	$	—	$	—	$	2,455
Short-term investments	191,248		66,040		—		257,288
Total cash and cash equivalents and investments	$	193,703	$	66,040	$	—	$	259,743

	Assets and Liabilities at Fair Value as of December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	45,093	$	1,507	$	—	$	46,600
Short-term investments	227,805		72,099		—		299,904
Total cash and cash equivalents and investments	$	272,898	$	73,606	$	—	$	346,504
Liabilities
Accrued liabilities	$	—	$	—	$	18,912	$	18,912
Total liabilities	$	—	$	—	$	18,912	$	18,912

The Company’s Level 3 liabilities, which consisted of the Symphony Icon purchase consideration liability, was estimated using a probability-based income approach utilizing an appropriate discount rate. Subsequent changes in the fair value of the Symphony Icon purchase consideration liability were recorded as an increase or decrease in Symphony Icon purchase liability expense in the accompanying consolidated statements of comprehensive loss. The following table summarizes the change in consolidated balance sheet carrying value associated with Level 3 liabilities for the three months ended March 31, 2017 and 2016 (in thousands).

Balance at December 31, 2016	$	18,912
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	2,101
Payment of contingent payment obligation with common stock and cash	(21,013		)
Balance at March 31, 2017	$	—
Balance at December 31, 2015	$	22,815
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	965
Balance at March 31, 2016	$	23,780

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include goodwill associated with the acquisitions of Coelacanth Corporation in 2001 and Symphony Icon in 2010 and intangible assets associated with the acquisition of Symphony Icon in 2010. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired.

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Debt Obligations

3 Months Ended

Mar. 31, 2017

Debt Obligations [Abstract]

Debt Disclosure

Debt Obligations

Convertible Debt. In November 2014, Lexicon completed an offering of $87.5 million in aggregate principal amount of its 5.25% Convertible Senior Notes due 2021 (the “Notes”). The conversion feature did not meet the criteria for bifurcation as required by generally accepted accounting principles and the entire principal amount was recorded as long-term debt on the Company’s consolidated balance sheets.

The Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the Company and Wells Fargo Bank, N.A., as trustee. The Notes bear interest at a rate of 5.25% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The Notes mature on December 1, 2021. The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the Company will deliver for each $1,000 principal amount of converted Notes a number of shares of its common stock equal to the conversion rate, as described in the Indenture. The conversion rate is initially 118.4553 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of $8.442 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances.

If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In connection with the issuance of the Notes, the Company incurred $3.4 million of debt issuance costs, which offsets long-term debt on the consolidated balance sheets. The debt issuance costs are amortized as interest expense over the expected life of the Notes using the effective interest method. The Company determined the expected life of the debt was equal to the seven-year term of the Notes. As of March 31, 2017, the balance of unamortized debt issuance costs was $2.2 million.

The fair value of the Notes was $161.1 million as of March 31, 2017 and was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

Mortgage Loan.  In April 2004, Lexicon obtained a $34.0 million mortgage on its facilities in The Woodlands, Texas.  The mortgage loan originally had a ten-year term with a 20-year amortization and a fixed interest rate of 8.23%. The mortgage was amended in September 2013 to extend the maturity date from April 2014 to April 2017, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged.  The mortgage had a principal balance outstanding of $15.8 million as of March 31, 2017. This entire balance is recorded as current portion of long-term debt in the accompanying consolidated balance sheet as of March 31, 2017 as there was a balloon payment due in April 2017. The mortgage was amended in April 2017 to extend the maturity date from April 2017 to April 2018, with the mortgage loan’s monthly payment amount and fixed interest rate each remaining unchanged. The buildings and land that serve as collateral for the mortgage loan are included in property and equipment at $59.2 million and $2.7 million, respectively, before accumulated depreciation, as of March 31, 2017. The fair value of Lexicon’s mortgage loan approximates its carrying value.  The fair value of Lexicon’s mortgage loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

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Arrangements with Symphony Icon Inc

3 Months Ended

Mar. 31, 2017

Arrangements with Symphony Icon Inc [Abstract]

Arrangements with Symphony Icon Inc

Arrangements with Symphony Icon, Inc.

On June 15, 2007, Lexicon entered into a series of related agreements providing for the financing of the clinical development of certain of its drug candidates, including XERMELO, along with any other pharmaceutical compositions modulating the same targets as those drug candidates (the “Programs”). The agreements included a Novated and Restated Technology License Agreement pursuant to which the Company licensed to Symphony Icon, a then wholly-owned subsidiary of Symphony Icon Holdings LLC (“Holdings”), the Company's intellectual property rights related to the Programs. Holdings contributed $45 million to Symphony Icon in order to fund the clinical development of the Programs.

Under a Share Purchase Agreement, dated June 15, 2007, between the Company and Holdings, the Company issued and sold to Holdings 1,092,946 shares of its common stock on June 15, 2007 in exchange for $15 million and an exclusive purchase option (the “Purchase Option”) that gave the Company the right to acquire all of the equity of Symphony Icon, thereby allowing the Company to reacquire all of the Programs. On July 30, 2010, Lexicon entered into an Amended and Restated Purchase Option Agreement (the “Purchase Option Agreement”) with Symphony Icon and Holdings and simultaneously exercised the Purchase Option, thereby reacquiring the Programs. Pursuant to the amended terms of the Purchase Option, Lexicon paid Holdings $10 million on July 30, 2010 and issued 1,891,074 shares of common stock to designees of Holdings on July 30, 2012 in satisfaction of an additional $35 million base payment obligation.

Lexicon also agreed to make up to $45 million in additional contingent payments, which would consist of 50% of any consideration Lexicon receives pursuant to any licensing transaction (a “Licensing Transaction”) under which Lexicon grants a third party rights to commercialize XERMELO or other pharmaceutical compositions modulating the same target as XERMELO (the “LG103 Programs”), subject to certain exceptions. The contingent payments would be due if and when Lexicon receives such consideration from a Licensing Transaction. In the event Lexicon received regulatory approval in the United States for the marketing and sale of any product resulting from the LG103 Programs prior to entering into a Licensing Transaction for the commercialization of such product in the United States, in lieu of any contingent payment from such a Licensing Transaction, Lexicon would pay Holdings the sum of $15 million and the amount of certain expenses Lexicon incurred after its exercise of the Purchase Option which were attributable to the development of such product, reduced by up to 50% of such sum on account of any contingent payments paid prior to such United States regulatory approval attributable to any such Licensing Transaction outside of the United States with respect to such product. In the event Lexicon made any such payment upon United States regulatory approval, Lexicon would have no obligation to make subsequent contingent payments attributable to any such Licensing Transactions for the commercialization of such product outside the United States until the proceeds of such Licensing Transactions exceed 50% of the payment made as a result of such United States regulatory approval. The contingent payments were payable in cash or a combination of cash and common stock, in Lexicon’s discretion, provided that no more than 50% of any contingent payment would be paid in common stock. In December 2014, Lexicon paid $5.8 million in cash and issued 666,111 shares of common stock to designees of Holdings in satisfaction of a $11.5 million contingent payment obligation as a result of receiving an upfront payment pursuant to Lexicon’s license and collaboration agreement with Ipsen. In April 2015, Lexicon paid $0.75 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving an additional upfront payment from Ipsen in March 2015. In September 2016, Lexicon paid $3.2 million in cash to Holdings in satisfaction of its contingent payment obligation as a result of receiving a milestone payment from Ipsen in August 2016 (see Note 8, Collaboration and License Agreements).

In September 2016, Lexicon entered into an amendment (the “Amendment”) to the Purchase Option Agreement with Holdings and Symphony Icon pursuant to which Lexicon agreed to pay Holdings $21.0 million upon Lexicon’s receipt of regulatory approval in the United States for the marketing and sale of XERMELO, such buyout amount to be in lieu of any remaining payments which may be or become payable to Holdings under the Purchase Option Agreement. The buyout amount may be paid in cash or a combination of cash and common stock, in Lexicon’s discretion, provided that no more than 50% of any contingent payment will be paid in common stock. In March 2017, Lexicon paid $10.5 million in cash and issued 659,905 in shares of common stock to designees of Holdings in satisfaction of its remaining contingent payment obligation as a result of receiving regulatory approval in the United States for the marketing and sale of XERMELO.

Lexicon accounted for the exercise of the Purchase Option and acquisition of Symphony Icon as a business combination. In connection with its acquisition of Symphony Icon, Lexicon paid $10.0 million in cash, and also agreed to pay Holdings additional base and contingent payments as discussed above. The fair value of the base and contingent consideration payments was $45.6 million and was estimated by applying a probability-based income approach utilizing an appropriate discount rate. This estimation was based on significant inputs that are not observable in the market, referred to as Level 3 inputs. Key assumptions include: (1) a discount rate of 14% for the base payments; (2) a discount rate of 18% for the contingent payments; and (3) a probability adjusted contingency. No discount rate was used in the valuation of the contingent consideration liability as of December 31, 2016 as the expected buyout was short-term in nature. As programs progress, the probability adjusted contingency was adjusted as necessary. Subsequent changes in the fair value of the Symphony Icon purchase consideration liability were recorded as increase or decrease in fair value of Symphony Icon purchase liability expense in the accompanying consolidated statements of comprehensive loss. The fair value of the Symphony Icon purchase consideration liability increased by $2.1 million and $1.0 million during the three months ended March 31, 2017 and March 31, 2016, respectively.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Commitments and Contingencies [Abstract]

Commitments and Contingencies Disclosure

Commitments and Contingencies

Operating Lease Obligations:  A Lexicon subsidiary leases office space in Basking Ridge, New Jersey under an operating lease agreement, the term of which began in June 2015 and terminates in December 2022. Rent expense is recognized on a straight-line basis over the lease term.  Lexicon is the guarantor of the obligations of its subsidiary under this lease agreement.  The maximum potential amount of future payments the Company could be required to make under this agreement is $3.6 million as of March 31, 2017. Additionally, Lexicon leases certain equipment under operating leases.

Legal Proceedings.  Lexicon is from time to time party to claims and legal proceedings that arise in the normal course of its business and that it believes will not have, individually or in the aggregate, a material adverse effect on its results of operations, financial condition or liquidity.

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Collaboration and License Agreements

3 Months Ended

Mar. 31, 2017

Collaboration and License Agreements [Abstract]

Collaborative Arrangement Disclosure

Collaboration and License Agreements

Lexicon has derived substantially all of its revenues from drug discovery and development collaborations, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, government grants and contracts, technology licenses, subscriptions to its databases and compound library sales.

Sanofi. In November 2015, Lexicon entered into a Collaboration and License Agreement (the “Sanofi Agreement”) with Sanofi for the worldwide development of Lexicon’s diabetes drug candidate sotagliflozin.

Under the Sanofi Agreement, Lexicon granted Sanofi an exclusive, worldwide, royalty-bearing right and license under its patent rights and know-how to develop, manufacture and commercialize sotagliflozin. Subject to specified exceptions, neither party may (a) perform clinical development activities relating to any other compound which inhibits sodium-glucose cotransporters type 1 or type 2 or (b) commercialize any such compounds in the United States, countries of the European Union and certain other specified countries, in each case during the royalty terms applicable in such countries. Among the specified exceptions is a right Lexicon retained to pursue the development of its LX2761 drug candidate, with respect to which Lexicon granted Sanofi certain rights of first negotiation specified in the Sanofi Agreement.

Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $300 million. In addition, Lexicon is eligible to receive from Sanofi (a) up to an aggregate of $110 million upon the achievement of two development milestones relating to the achievement of positive results in certain Phase 3 clinical trials in type 2 diabetes patients, with such aggregate amount being predominantly allocated to one of the two development milestones, (b) up to an aggregate of $220 million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate to type 1 diabetes, (c) $100 million upon the achievement of a milestone based on the results of an outcomes study in type 2 diabetes patients the completion of which would likely occur after initial regulatory approval, and (d) up to an aggregate of $990 million upon the achievement of six commercial milestones that will be achieved upon reaching specified levels of sales. The Company believes that each of the development and regulatory milestones under the Sanofi Agreement is substantive. Due to the uncertainty surrounding the achievement of the future development and regulatory milestones, these payments will not be recognized as revenue unless and until they are earned, as the Company is not able to reasonably predict if and when the milestones will be achieved. Commercial milestones, which are not encompassed within the definition of milestones under generally accepted accounting principles, will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met. Lexicon is also entitled to tiered, escalating royalties ranging from low double digit percentages to forty percent of net sales of sotagliflozin, based on indication and territory, with royalties for the higher band of such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty reduction provisions. Royalties payable with respect to net sales of sotagliflozin for type 1 diabetes in the United States will also be reduced in the event Lexicon does not exercise its co-promotion option described below.

Lexicon will continue to be responsible for all clinical development activities relating to type 1 diabetes and will retain an exclusive option to co-promote and have a significant role, in collaboration with Sanofi, in the commercialization of sotagliflozin for the treatment of type 1 diabetes in the United States. If Lexicon exercises its co-promotion option, Lexicon will fund forty percent of the commercialization costs relating to such co-promotion activities. Sanofi will be responsible for all clinical development and commercialization of sotagliflozin for the treatment of type 2 diabetes worldwide and will be solely responsible for the commercialization of sotagliflozin for the treatment of type 1 diabetes outside the United States. Lexicon will share in the funding of a portion of the planned type 2 diabetes development costs over the next three years, up to an aggregate of $100 million. Sanofi will book sales worldwide in all indications.

The parties are responsible for using commercially reasonable efforts to perform their development and commercialization obligations pursuant to mutually approved development and commercialization plans.

The parties’ activities under the Sanofi Agreement are governed by a joint steering committee and certain other governance committees which reflect equal or other appropriate representation from both parties. If the applicable governance committee is not able to make a decision by consensus and the parties are not able to resolve the issue through escalation to specified senior executive officers of the parties, then Sanofi will have final decision-making authority, subject to limitations specified in the Sanofi Agreement.

The Sanofi Agreement will expire upon the expiration of all applicable royalty terms for all licensed products in all countries. The royalty term for each licensed product in each country is the period commencing on the effective date of the Sanofi Agreement and ending on the latest of expiration of specified patent coverage, expiration of specified regulatory exclusivity and 10 years following the first commercial sale in the applicable country. Either party may terminate the Sanofi Agreement in the event of an uncured material breach by the other party. Prior to completion of the core development activities for type 2 diabetes specified in the development plan, Sanofi may terminate the Sanofi Agreement on a country-by-country and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c) the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual property rights.

The Company considered the following deliverables with respect to the revenue recognition of the $300 million upfront payment:

• The exclusive worldwide license granted to Sanofi to develop and commercialize sotagliflozin;

• The development services Lexicon is performing for sotagliflozin relating to type 1 diabetes; and

• The funding Lexicon will provide for development relating to type 2 diabetes.

The Company determined that the license had stand-alone value because it is an exclusive license that gives Sanofi the right to develop and commercialize sotagliflozin or to sublicense its rights. In addition, sotagliflozin is currently in development and it is possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Sanofi Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services for type 1 diabetes and the obligation to provide funding for development services for type 2 diabetes over the period of time Lexicon performs services or provides funding, currently expected to be through 2020.

The Company determined that the initial allocable arrangement consideration was the $300 million upfront payment because it was the only payment that was fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments or royalty payments. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of the license included: exercising the option to co-promote, estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services for type 1 diabetes by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $100 million in funding.

As a result of the allocation, the Company recognized $126.8 million of the $300 million upfront payment for the license in 2015. The Company is recognizing the $113.8 million allocated to the development services deliverable and the $59.4 million allocated to the funding deliverable over the estimated period of performance as the development and funding occurs. Revenue recognized under the Sanofi Agreement was $17.0 million and $12.0 million for the three months ended March 31, 2017 and 2016, respectively.

Ipsen Pharma SAS. In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen Pharma SAS (“Ipsen”) for the development and commercialization of telotristat ethyl outside of the United States and Japan (the “Licensed Territory”).

Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent rights and know-how to commercialize telotristat ethyl in the Licensed Territory. Ipsen is responsible for using diligent efforts to commercialize telotristat ethyl in the Licensed Territory pursuant to a mutually approved commercialization plan. Subject to certain exceptions, Lexicon will be responsible for conducting clinical trials required to obtain regulatory approval for telotristat ethyl for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan, and will have the first right to conduct most other clinical trials of telotristat ethyl. Lexicon is responsible for the costs of all clinical trials contemplated by the initial development plan. The costs of additional clinical trials will be allocated between the parties based on the nature of such clinical trials. Under the Ipsen Agreement, Ipsen has paid Lexicon an aggregate of $30.9 million through March 31, 2017, consisting of $24.5 million in upfront payments and a $6.4 million milestone payment in August 2016 upon the acceptance of the filing submitted by Ipsen to the European Medicines Agency for telotristat ethyl as an adjunct to somatostatin analog therapy for the long-term treatment of carcinoid syndrome. In addition, Lexicon is eligible to receive from Ipsen (a) up to an aggregate of approximately $27 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an aggregate of €72 million upon the achievement of specified sales milestones. Due to the uncertainty surrounding the achievement of the future regulatory and sales milestones, these payments will not be recognized as revenue unless and until they are earned as the Company is not able to reasonably predict if and when the milestones will be achieved. Lexicon is also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of telotristat ethyl in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture and supply of such units of telotristat ethyl. Lexicon and Ipsen have entered into a commercial supply agreement pursuant to which Lexicon will supply Ipsen’s commercial requirements of telotristat ethyl, and Ipsen will pay an agreed upon transfer price for such commercial supply.

The Company considered the following deliverables with respect to the revenue recognition of the $24.5 million upfront payments:

• The exclusive license granted to Ipsen to develop and commercialize telotristat ethyl in the Licensed Territory;

•The development services Lexicon is performing for telotristat ethyl;

• The obligation to participate in committees which govern the development of telotristat ethyl until commercialization; and

•The obligation to supply commercial supply of telotristat ethyl, under a commercial supply agreement.

The Company determined that the license had stand-alone value because it is an exclusive license that gives Ipsen the right to develop and commercialize telotristat ethyl or to sublicense its rights. In addition, telotristat ethyl is currently in development and it is possible that Ipsen or another third party could conduct clinical trials without assistance from Lexicon. As a result, the Company considers the license and the development services under the Ipsen Agreement to be separate units of accounting. The Company recognized the portion of the consideration allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement. The Company is recognizing as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performs services, currently expected to be through mid-2017.

Due to the inherent uncertainty in obtaining regulatory approval, the applicability of the commercial supply agreement is outside the control of Lexicon and Ipsen. Accordingly, the Company has determined the commercial supply agreement is a contingent deliverable at the onset of the Ipsen Agreement. As a result, the Company has determined the commercial supply agreement does not meet the definition of a deliverable that needs to be accounted for at the inception of the arrangement. The Company has also determined that there is no significant and incremental discount related to the commercial supply agreement that should be accounted for at the inception of the arrangement.

The Company determined that the initial allocable arrangement consideration was the $24.5 million upfront payments because they were the only payments that were fixed and determinable at the inception of the arrangement. There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished drug product. As such, the Company did not include those payments in the allocable consideration. The Company allocated the allocable consideration based on the relative best estimate of selling price of each unit of accounting. The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate. The significant inputs the Company used to determine the projected income of the license included: estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate. The Company estimated the selling price of the development services by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development. The Company estimated the selling price of the obligation to participate in committees by using internal estimates of the number of internal hours and salary and benefits costs to perform these services.

As a result of the allocation, the Company recognized $21.2 million of the $24.5 million upfront payments for the license in 2014, and an additional $1.4 million in 2015 upon entering into the amendment. The Company is recognizing the $1.7 million allocated to the development services deliverable over the estimated period of performance as development occurs, and is recognizing the $0.1 million allocated to the committee participation deliverable ratably over the estimated period of performance. Milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. Revenue recognized under the Ipsen Agreement was $0.5 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2017

Summary of Significant Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

The accompanying consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates: The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.  As of March 31, 2017 and December 31, 2016, short-term investments consist of U.S. treasury bills and corporate debt securities. The Company’s short-term investments are classified as available-for-sale securities and are carried at fair value, based on quoted market prices of the securities.  The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security.  Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity.  Net realized gains and losses, interest and dividends are included in interest income.  The cost of securities sold is based on the specific identification method.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Accounts Receivable:  Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services.   The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the economic climate and other factors that could affect collectibility.  Write-offs are evaluated on a case by case basis.

Inventory, Policy [Policy Text Block]

Inventory: Inventories are determined at the lower of cost or market value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods.

Concentration Risk Disclosure [Text Block]

Concentration of Credit Risk: Lexicon’s cash equivalents, investments and accounts receivable represent potential concentrations of credit risk. The Company attempts to minimize potential concentrations of risk in cash equivalents and investments by placing investments in high-quality financial instruments. The Company’s accounts receivable are unsecured and are concentrated in pharmaceutical and biotechnology companies located in Europe and the United States.  The Company has not experienced any significant credit losses to date.  

Segment Reporting, Policy [Policy Text Block]

Segment Information and Significant Customers: Lexicon operates in one business segment, which primarily focuses on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease. Substantially all of the Company’s revenues have been derived from drug discovery alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology licenses, subscriptions to its databases, government grants and contracts, compound library sales and product sales.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment: Property and equipment that is held and used is carried at cost and depreciated using the straight-line method over the estimated useful life of the assets which ranges from three to 40 years.  Maintenance, repairs and minor replacements are charged to expense as incurred.  Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term.  Significant renewals and betterments are capitalized.

Goodwill and Intangible Assets, Intangible Assets, Indefinite-Lived, Policy [Policy Text Block]

Other Intangible Assets: Other intangible assets, net consist of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets:  Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Impairment or Disposal of Long-Lived Assets, Including Intangible Assets, Policy [Policy Text Block]

Indefinite lived intangible assets are also tested annually for impairment and whenever indicators of impairment are present. When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its intangible assets. If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates the asset’s fair value. If the carrying value of the asset exceeds its fair value, then the intangible asset is written down to its fair value.

Goodwill Impairment:  Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level.  The Company has determined that the reporting unit is the single operating segment disclosed in its current financial statements. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill.  If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized.  Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition: Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.  

Product Revenues

Product revenues consist of U.S. sales of XERMELO. Product revenues are recognized once the Company meets all four revenue recognition criteria described above. In March 2017, Lexicon began shipping XERMELO to its customers in the U.S. The Company recognizes revenue for product sales of XERMELO at the time the product is received by its specialty pharmacy customers net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the U.S. Product shipping and handling costs are included in cost of sales.

Customer Credits: The specialty pharmacies are offered various forms of consideration, including allowances, service fees and prompt payment discounts. Lexicon expects the specialty pharmacies will earn prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates are based in part on third party market research data, and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy, in turn, charges back to Lexicon the difference between the price initially paid by the specialty pharmacy and the discounted price paid to the specialty pharmacy by the customer. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Collaborative Agreements

Revenues under collaborative agreements include both license revenue and contract research revenue. Activities under collaborative agreements are evaluated to determine if they represent a multiple element revenue agreement. The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. The Company accounts for those components as separate units of accounting if the following two criteria are met:

• The delivered item or items have value to the customer on a stand-alone basis; and

• If there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company’s control.

Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the licensee could use the delivered item for its intended purpose without the receipt of the remaining deliverables. If multiple deliverables included in an arrangement are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. Arrangement consideration is allocated at the inception of the arrangement to the identified units of accounting based on their relative estimated selling price. Revenue is recognized for each unit of accounting when the appropriate revenue recognition criteria are met.

Future milestone payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. A milestone is substantive if:

• The consideration payable to the Company is commensurate with the Company’s performance necessary to achieve the milestone or the increase in value to the collaboration resulting from the Company’s performance;

• Relates solely to the Company’s past performance; and

• Is reasonable relative to all of the other deliverables and payments within the arrangement.

Commercial milestones will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Subscription and license fees are recognized as revenue upon the grant of the technology license when performance is complete and there is no continuing involvement. Royalty revenues are recognized as earned in accordance with the contract terms at the time the royalty amount is fixed and determinable based on information received from the sublicensees and at the time collectibility is reasonably assured.

Cost of Sales, Policy [Policy Text Block]

Cost of Sales: Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO. The Company began capitalizing inventory during the three months ended March 31, 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to approval of XERMELO have been recorded as research and development expense in the statements of operations. As a result, cost of sales for approximately the next two years will reflect a lower average per unit cost of materials. Product shipping and handling costs are included in cost of sales. Cost of sales also includes the amortization of the in-process research and development intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Research and Development Expense, Policy [Policy Text Block]

Research and Development Expenses: Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred.  Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation:  The Company recognizes compensation expense in its statements of comprehensive loss for share-based payments, including stock options and restricted stock units issued to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award.  Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met.  

The fair value of stock options is estimated at the date of grant using the Black-Scholes method.  The Black-Scholes option-pricing model requires the input of subjective assumptions.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.  For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in a change in the assumptions used for expected option lives and forfeitures.  Expected volatility is based on the historical volatility in the Company’s stock price.

Earnings Per Share, Policy [Policy Text Block]

Net Loss per Common Share: Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units are not included because they are antidilutive.

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Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2017

Summary of Significant Accounting Policies [Abstract]

Inventory, Major Classes, Policy [Policy Text Block]

Raw materials	$	200
Work-in-process	1
Finished goods	35
Total inventory	$	236

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Summary of Significant Accounting Policies Equity Incentive Awards (Tables)

3 Months Ended

Mar. 31, 2017

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Expected Volatility		Risk-free Interest Rate		Expected Term	Dividend Rate
March 31, 2017:
Employees	62	%	1.7	%	4	—	%
Officers and non-employee directors	71	%	2.3	%	8	—	%
March 31, 2016:
Employees	63	%	1.1	%	4	—	%
Officers and non-employee directors	83	%	1.6	%	8	—	%

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	Options		Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2016	4,834		$	11.24
Granted	709		14.43
Exercised	(96	)	11.53
Expired	(120	)	27.58
Forfeited	(3	)	15.80
Outstanding at March 31, 2017	5,324		11.29
Exercisable at March 31, 2017	2,875		$	11.48

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

	Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at December 31, 2016	875		$	8.13
Granted	418		14.44
Vested	(286	)	8.78
Forfeited	(4	)	10.37
Outstanding at March 31, 2017	1,003		$	10.56

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Cash and Cash Equivalents and Investments (Tables)

3 Months Ended

Mar. 31, 2017

Cash and Cash Equivalents and Investments [Abstract]

Schedule of Cash, Cash Equivalents and Short-term Investments [Table Text Block]

	As of March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash and cash equivalents	$	2,455	$	—	$	—		$	2,455
Securities maturing within one year:
U.S. treasury securities	191,443		—		(195		)	191,248
Corporate debt securities	66,109		—		(69		)	66,040
Total short-term investments	$	257,552	$	—	$	(264	)	$	257,288
Total cash and cash equivalents and investments	$	260,007	$	—	$	(264	)	$	259,743
	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(in thousands)
Cash and cash equivalents	$	46,600	$	—	$	—		$	46,600
Securities maturing within one year:
U.S. treasury securities	227,911		1		(107		)	227,805
Corporate debt securities	72,188		1		(90		)	72,099
Total short-term investments	$	300,099	$	2	$	(197	)	$	299,904
Total cash and cash equivalents and investments	$	346,699	$	2	$	(197	)	$	346,504

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2017

Fair Value Measurements [Abstract]

Fair Value, by Balance Sheet Grouping [Table Text Block]

	Assets and Liabilities at Fair Value as of March 31, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	2,455	$	—	$	—	$	2,455
Short-term investments	191,248		66,040		—		257,288
Total cash and cash equivalents and investments	$	193,703	$	66,040	$	—	$	259,743

	Assets and Liabilities at Fair Value as of December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Cash and cash equivalents	$	45,093	$	1,507	$	—	$	46,600
Short-term investments	227,805		72,099		—		299,904
Total cash and cash equivalents and investments	$	272,898	$	73,606	$	—	$	346,504
Liabilities
Accrued liabilities	$	—	$	—	$	18,912	$	18,912
Total liabilities	$	—	$	—	$	18,912	$	18,912

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

Balance at December 31, 2016	$	18,912
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	2,101
Payment of contingent payment obligation with common stock and cash	(21,013		)
Balance at March 31, 2017	$	—
Balance at December 31, 2015	$	22,815
Change in valuation of purchase consideration payable to former Symphony Icon stockholders	965
Balance at March 31, 2016	$	23,780

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Summary of Significant Accounting Policies (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Summary of Significant Accounting Policies [Abstract]
XERMELO Intangible Assets Finite Lived	$ 24,700
Amortization of Intangible Assets	100
Deferred Income Tax Expense (Benefit)	$ (8,652)	$ 0

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Summary of Significant Accounting Policies Inventory (Details) $ in Thousands	Mar. 31, 2017 USD ($)
Inventory [Line Items]
Inventory, Raw Materials, Gross	$ 200
Inventory, Work in Process, Gross	1
Inventory, Finished Goods, Gross	35
Inventory, Gross	$ 236

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Summary of Significant Accounting Policies Stock-based Compensation Valuation (Details) - Equity Option [Member]	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, ExpectedVolatilityRate, Employees	62.00%	63.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate, Employee	1.70%	1.10%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term, Employees	4 years	4 years
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate, Employees	0.00%	0.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate, Officers and Non-employee Directors	71.00%	83.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate, Officers and Non-employee Directors	2.30%	1.60%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term, Officers and Non-employee Directors	8 years	8 years
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate, Officers and Non-employee Directors	0.00%	0.00%

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Summary of Significant Accounting Policies Stock-based Compensation Summary (Details) - $ / shares shares in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	5,324	4,834
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price	$ 11.29	$ 11.24
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures	709
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price	$ 14.43
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	96
Share-based Compensation Arrangements by Share-based Payment Award, Options, Exercises in Period, Weighted Average Exercise Price	$ 11.53
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period	120
Share-based Compensation Arrangements by Share-based Payment Award, Options, Expirations in Period, Weighted Average Exercise Price	$ 27.58
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period	3
Share-based Compensation Arrangements by Share-based Payment Award, Options, Forfeitures in Period, Weighted Average Exercise Price	$ 15.80
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number	2,875
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Weighted Average Exercise Price	$ 11.48
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number	1,003	875
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value	$ 10.56	$ 8.13
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	418
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value	$ 14.44
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period	286
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Weighted Average Grant Date Fair Value	$ 8.78
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeited in Period	4
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeitures, Weighted Average Grant Date Fair Value	$ 10.37

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Recent Accounting Pronouncements (Details) $ in Millions	Jan. 01, 2017 USD ($)
Recent Accounting Pronouncements [Abstract]
Accumulated Excess Tax Benefits Recognized as Deferred Tax Assets	$ 6.1
Adjustment to Accumulated Deficit	$ 2.0

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Cash and Cash Equivalents and Investments (Details 1) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Cash and Cash Equivalents
Fair Value
Amortized Cost	$ 2,455	$ 46,600
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Estimated Fair Value	2,455	46,600
U.S. Treasury Securities
Fair Value
Amortized Cost	191,443	227,911
Gross Unrealized Gains	0	1
Gross Unrealized Losses	(195)	(107)
Estimated Fair Value	191,248	227,805
Corporate Debt Securities
Fair Value
Amortized Cost	66,109	72,188
Gross Unrealized Gains	0	1
Gross Unrealized Losses	(69)	(90)
Estimated Fair Value	66,040	72,099
Total Short-term Investments
Fair Value
Amortized Cost	257,552	300,099
Gross Unrealized Gains	0	2
Gross Unrealized Losses	(264)	(197)
Estimated Fair Value	257,288	299,904
Total Cash and Cash Equivalents and Investments
Fair Value
Amortized Cost	260,007	346,699
Gross Unrealized Gains	0	2
Gross Unrealized Losses	(264)	(197)
Estimated Fair Value	$ 259,743	$ 346,504

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Cash and Cash Equivalents and Investments (Details 2) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Schedule of Investments [Line Items]
Realized Investment Gains (Losses)	$ (7,000)	$ 0

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Fair Value Measurements (Details 1) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Fair Value, Level 1
Fair Value
Cash and Cash Equivalents	$ 2,455	$ 45,093
Short-term Investments	191,248	227,805
Total Cash and Cash Equivalents and Investments	193,703	272,898
Accrued Liabilities		0
Total Liabilities		0
Fair Value, Level 2
Fair Value
Cash and Cash Equivalents	0	1,507
Short-term Investments	66,040	72,099
Total Cash and Cash Equivalents and Investments	66,040	73,606
Accrued Liabilities		0
Total Liabilities		0
Fair Value, Level 3
Fair Value
Cash and Cash Equivalents	0	0
Short-term Investments	0	0
Total Cash and Cash Equivalents and Investments	0	0
Accrued Liabilities		18,912
Total Liabilities		18,912
Fair Value, Total
Fair Value
Cash and Cash Equivalents	2,455	46,600
Short-term Investments	257,288	299,904
Total Cash and Cash Equivalents and Investments	$ 259,743	346,504
Accrued Liabilities		18,912
Total Liabilities		$ 18,912

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Fair Value Measurements (Details 2) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Dec. 31, 2015
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Gain (Loss) Included in Earnings	$ 2,101	$ 965
Fair Value, Measurement with Unobservable Inputs Reconciliations, Recurring Basis, Liability Value	0	$ 23,780	$ 18,912	$ 22,815
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Liability, Settlements	$ (21,013)

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Fair Value Measurements (Details 3) $ in Millions	Jul. 30, 2012 USD ($) shares
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Symphony Base Payment in Shares | shares	1,891,074
Symphony Base Payment Obligation | $	$ 35

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Debt Obligations (Details) $ / shares in Units, $ in Millions	1 Months Ended
	Nov. 30, 2014 USD ($)	Apr. 30, 2004 USD ($)	Mar. 31, 2017 USD ($) $ / shares
Debt Instrument [Line Items]
Proceeds from Convertible Debt	$ 87.5
Convertible Debt Instrument Interest Rate Stated Percentage			5.25%
Debt Instrument, Convertible, Conversion Ratio	118.4553
Debt Instrument, Convertible, Conversion Price | $ / shares			$ 8.442
Debt Issuance Cost	$ 3.4
Unamortized Debt Issuance Expense			$ 2.2
Debt Instrument, Fair Value Disclosure			161.1
Buildings Collateral			59.2
Land Collateral			$ 2.7
Mortgage Loans on Real Estate, New Mortgage Loans		$ 34.0
Debt Instrument, Interest Rate, Stated Percentage			8.23%
Mortgage Loans on Real Estate, Carrying Amount of Mortgages			$ 15.8

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Arrangements with Symphony Icon Inc (Details) - USD ($) $ in Thousands	1 Months Ended				3 Months Ended
	Mar. 31, 2017	Sep. 30, 2016	Apr. 30, 2015	Dec. 31, 2014	Mar. 31, 2017	Mar. 31, 2016	Jul. 30, 2012	Jul. 30, 2010	Jun. 15, 2007
Loss Contingencies [Line Items]
Holdings Contribution to Icon									$ 45,000
Lexicon Sold Shares to Holdings									1,092,946
Lexicon Received Cash from Holdings									$ 15,000
Lexicon Paid Holdings Cash								$ 10,000
Symphony Base Payment in Shares							1,891,074
Symphony Base Payment Obligation							$ 35,000
Symphony Contingent Payment Maximum								$ 45,000
Symphony Contingent Payment Percentage								50.00%
Symphony Regulatory Approval Payment								$ 15,000
Symphony Regulatory Approval Reduction Percentage								50.00%
Symphony Regulatory Approval Percentage Limit								50.00%
Symphony Payment in Stock Limitation								50.00%
Symphony Contingent Payment In Cash	$ 10,500	$ 3,200	$ 750	$ 5,800
Symphony Amendment Buyout		$ 21,000
Symphony Contingent Payment in Shares	659,905			666,111
Symphony Contingent Payment Total				$ 11,500
Symphony Fair Value of Base and Contingent Payments								$ 45,600
Symphony Base Payment Discount Rate								14.00%
Symphony Contingent Payment Discount Rate								18.00%
Increase in fair value of Symphony Icon, Inc. purchase liability					$ 2,101	$ 965
Document Period End Date					Mar. 31, 2017

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Commitments and Contingencies (Details) $ in Millions	Mar. 31, 2017 USD ($)
Operating Leased Assets [Line Items]
Guarantor Obligations, Maximum Exposure, Undiscounted	$ 3.6

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Collaboration and License Agreements (Details) € in Millions, $ in Millions	1 Months Ended					3 Months Ended		12 Months Ended
	Aug. 31, 2016 USD ($)	Nov. 30, 2015 USD ($)	Mar. 31, 2015 USD ($)	Oct. 31, 2014 USD ($)	Oct. 31, 2014 EUR (€)	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($)
Collaboration and License Agreements [Abstract]
Sanofi Upfront Payment		$ 300.0
Sanofi Development Milestones		110.0
Sanofi Regulatory Milestones		220.0
Sanofi Outcomes Study Milestone		100.0
Sanofi Sales Milestone Payments		990.0
Sanofi Commercialization Costs Funded by Lexicon Maximum Amount		100.0
Sanofi Revenue Allocated to License Deliverable		126.8
Sanofi Revenue Allocated to Development Deliverable		113.8
Sanofi Revenue Allocated to Funding Deliverable		$ 59.4
Sanofi Revenue Recognized						$ 17.0	$ 12.0
Ipsen Total Payments						30.9
Ipsen Maximum Regulatory And Commercial Milestones				$ 27.0
Ipsen Maximum Sales Milestones | €					€ 72
Ipsen Total Upfront Payments			$ 24.5
Ipsen Milestone Payment	$ 6.4
Ipsen Revenue Allocated to License Deliverable								$ 1.4	$ 21.2
Ipsen Revenue Allocated to Development Deliverable				1.7
Ipsen Revenue Allocated to Committee Deliverable				$ 0.1
Ipsen Revenue Recognized						$ 0.5	$ 0.1